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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

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

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price of the common stock was $40 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020.

Over what period of time should compensation cost be allocated?

Briefly explain why corporations issue convertible securities.

CA16-3 WRITING (Stock Warrants—Various Types) For various reasons a corporation may issue warrants to purchase shares of its common stock at specified prices that, depending on the circumstances, may be less than, equal to, or greater than the current market price. For example, warrants may be issued:

1. To existing stockholders on a pro rata basis.

2. To certain key employees under an incentive stock-option plan.

3. To purchasers of the corporation’s bonds.

Instructions

For each of the three examples of how stock warrants are used:

(a) Explain why they are used.

(b) Discuss the significance of the price (or prices) at which the warrants are issued (or granted) in relation to (1) the current market price of the company’s stock, and (2) the length of time over which they can be exercised.

(c) Describe the information that should be disclosed in financial statements, or notes thereto, that are prepared when stock warrants are outstanding in the hands of the three groups listed above

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