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(EPS with Convertible Bonds, Various Situations) In 2016, Chirac Enterprises issued, at par, 60 \(1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of \)17,500 and expenses other than interest andtaxes of $8,400 for 2017. (Assume that the tax rate is 40%.) Throughout 2017, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.

Instructions

a) Compute diluted earnings per share for 2017.

b) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on September 1, 2017 (rather than in 2016), and none have been converted or redeemed. Compute diluted earnings per share for 2017.

c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017.

Short Answer

Expert verified

Diluted earnings per share

a) $0.6825

b) $1.365

c) $0.6825

Step by step solution

01

Meaning of Earnings per Share

Earnings per share is a profitability metric used by the investors that shows the part of the company's profits to be distributed to each share of common stock.

02

Calculation of diluted earnings per share for 2017 for part a

Dilutedearningspershare=Netincome+Interest(Netoftax)Weightednumberofsharesoutstanding+Potentiallydilutivecommonshares=$2,580+$4,800(10.40)2000+6000=0.6825

Working note:

Computation of Net Income

Net Income

$17,500

Less: Other than Interest

$8,400

Less: Bond Interest(60×$1,000×8%)

$4,800

Income before interest and taxes

$4,300

Less: Tax @40%

$1,720

Net Income

$2,580

03

Step 3:Calculation of diluted earnings per share for 2017 for part b

Dilutedearningspershare=Netincome+Interest(Netoftax)Weightednumberofsharesoutstanding+Potentiallydilutivecommonshares=$4,500+$1,600(10.40)2000+(6000×412)=1.365

Working note:

Computation of Net Income

Net Income

$17,500

Less: Other than Interest

$8,400

Less: Bond Interest(60×$1,000×8%×412)

$1,600

Income before interest and taxes

$7,500

Less: Tax @40%

$3,000

Net Income

$4,500

04

Calculation of diluted earnings per share for 2017 for part c

Working note:

Computation of Net Income

Net Income

$17,500

Less: Other than Interest

$8,400

Less: Bond Interest[(60×$1,000×8%×612)+(40×$1,000×8%×612)]

$4,000

Income before interest and taxes

$5,100

Less: Tax @40%

$2,040

Net Income

$3,060

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Most popular questions from this chapter

(Accounting for Restricted Stock) Tweedie Company issues 10,000 shares of restricted stock to its CFO, Mary Tokar, on January 1, 2017. The stock has a fair value of \(500,000 on this date. The service period related to this restricted stock is 5 years. Vesting occurs if Tokar stays with the company until December 31, 2021. The par value of the stock is \)10. At December31, 2017, the fair value of the stock is $450,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant), and December 31, 2018.

(b) On July 25, 2021, Tokar leaves the company. Prepare the journal entry (if any) to account for this forfeiture

Earnings per share can affect market prices of common stock. Can market prices affect earnings per share? Explain.

(Conversion of Bonds) Vargo Company has bonds payable outstanding in the amount of \(500,000, and the Premium on Bonds Payable account has a balance of \)7,500. Each \(1,000 bond is convertible into 20 shares of preferred stock of parvalue of \)50 per share. All bonds are converted into preferred stock.

Question: (Conversion of Bonds) On January 1, 2017, Gottlieb Corporation issued \(4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semi-annually on June 30 and December 31. Each \)1,000 debenture can be converted into eight shares of Gottlieb Corporation \(100 par value common stock after December 31, 2018. On January 1, 2019, \)400,000 of debentures are converted into common stock, which is then selling at \(110. An additional \)400,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a) December 31, 2018. (c) March 31, 2019.

(b) January 1, 2019. (d) June 30, 2019.

Record the conversions using the book value method

Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that instead of options, Barwood granted 2,000 shares of restricted stock.

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