Question

During 2020, XYZ Corporation had 1,000,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. XYZ declared dividends of $200,000 and $400,000 to preferred and common shareholders, respectively, during 2020.
On January 1, 2010, XYZ issued $2,100,000 of convertible 6% bonds at face value. Each $1,000 bond is convertible into five common shares. XYZ's net income for the year ended December 31, 2020, was $6,200,000. The income tax rate is 25%.

Required:
a. What is XYZ's basic earnings per share for 2020, rounded to the nearest cent?
b. What will XYZ report as diluted earnings per share for 2020, rounded to the nearest cent?

Answer 1

Answer:

XYZ Corporation

a. Basic earnings per share = $6,000,000/1,000,000

= $6.00

b. Diluted earnings per share = $6,000,000/1,010,500

= $5.94

Explanation:

a) Data and Calculations:

Outstanding shares December 31, 2020:

Common stock = 1,000,000 shares

6% Preferred stock = 50,000 shares

Dividends declared:

Preferred $200,000

Common $400,000

Issue of shares during the year:

6% Convertible Bonds = $2,100,000

Each $1,000 bond convertible into = 5 common shares

= $2,100,000/$1,000 * 5 = 10,500

Net income for the year = $6,200,000

Preferred dividend =              (200,000)

Available for common stock = $6,000,000 ($6,200,000 - $200,000)

Income tax rate = 25%