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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

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2016, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ \(5 par value common stock at a price of \)20 per share. The options were exercisable within a 2-year period beginning January 1, 2018, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at \(25 per share, and a fairvalue option-pricing model determines total compensation to be \)400,000.On May 1, 2018, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2020 because executives decided not to exercise their options.

Instructions

Prepare the necessary journal entries related to the stock option plan for the years 2016 through 2020.

Where can authoritative IFRS be found related to dilutive securities, stock-based compensation, and earnings per share?

What are the computational guidelines for determining whether a convertible security is to be reported as part of diluted earnings per share?

Four years after issue, debentures with a face value of \(1,000,000 and book value of \)960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time, the market price of the debentures is 104, and the common stock is selling at \(14 per share (par value \)10). The company records the conversion as follows. Bonds Payable 1,000,000 Discount on Bonds Payable 40,000 Common Stock 800,000 Paid-in Capital in Excess of Par— Common Stock 160,000 Discuss the propriety of this accounting treatment.

What are the arguments for giving separate accounting recognition to the conversion feature of debentures?

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