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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

The 2017 income statement of Wasmeier Corporation showed net income of \(480,000 and a loss from discontinued operations of \)120,000. Wasmeier had 100,000 shares of common stock outstanding all year. Prepare Wasmeier’s income statement presentation of earnings per share.

(Conversion of Bonds) The December 31, 2017, balance sheet of Kepler Corp. is as follows.10% callable, convertible bonds payable (semiannual interest dates April 30 and October 31; convertible into 6 shares of \(25 par value common stock per \)1,000 of bond principal; maturity date April 30, 2023) \(500,000Discount on bonds payable 10,240 \)489,760On March 5, 2018, Kepler Corp. called all of the bonds as of April 30 for the principal plus interest through April 30. By April 30, all bondholders had exercised their conversion to common stock as of the interest payment date. Consequently, on April 30, Kepler Corp. paid the semiannual interest and issued shares of common stock for the bonds. The discount is amortized on a straight-line basis. Kepler uses book value method.

Prepare the entry(the ies) to record the interest expense and conversion on April 30, 2018. Reversing entries were made on January 1, 2018. (Round to the nearest dollar.)

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.

Angela Corporation issues 2,000 convertible bonds at January 1, 2016. The bonds have a 3-year life, and are issued at par with a face value of \(1,000 per bond, giving total proceeds of \)2,000,000. Interest is payable annually at 6%. Each bond is convertible into 250 ordinary shares (par value of $1). When the bonds are issued, the market rate of interest for similar debt without the conversion option is 8%.

Instructions

(a) Compute the liability and equity component of the convertible bond on January 1, 2016.

(b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2016.

(c) Prepare the journal entry to record the repurchase of the convertible bond for cash at January 1, 2019, its maturity date.

How is antidilution determined when multiple securities are involved?

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