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(EPS with Convertible Bonds) On June 1, 2015, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.On April 1, 2017, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2017.Lancaster Inc. also issued \(600,000 of 20-year, 8% convertible bonds at par on July 1, 2017. Each \)1,000 bond converts to 40shares of common at any interest date. None of the bonds have been converted to date.Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2017. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%.)

Instructions

Determine the following for 2017.

(a) The number of shares to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share.

(b) The earnings figures to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share

Short Answer

Expert verified

a.

(1) Basic earnings per share= 1,100,000

(2) Diluted earnings per share= 1,112,000

b.

(1) Basic earnings per share= $1,540,000

(2) Diluted earnings per share= $1,554,400

Step by step solution

01

a. Computation of no shares to be used for calculation:

1.

Jan 1 – Apr, 800,000 shares x 3/12

200,000

Apr 1- Dec,1200,000 shares x 9/12

900,000

1,100,000

2.

Jan 1 - Apr 80,000 share x 3/12

200,000

Apr 1-Jul,1200,000 x 3/12

300,000

Jul 1-Dec,1224,000 x 6/12

612,000

1,112,000

02

 Computation of earnings figure to be used:

Income for basic earnings per share equals $1,540,000, and for diluted per share equals$1,554,400.

After tax Net Income

$1,540,000

Add: Interest savings ($600,000 x 0.08 x½)

$24,000

Less: Lost tax benefit ($24,000 x 0.40)

($9,600)

Adjusted net income

$1,554,400

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Most popular questions from this chapter

IFRS16-3 Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of \(400,000, and pay interest annually at a rate of 4%. The equity component of the bond issue has a fair value of \)35,000. Greg Shark is curious as to the difference in accounting for these bonds if the company were to use IFRS.

(a) Prepare the entry to record issuance of the bonds at par under GAAP.

(b) Repeat the requirement for part (a), assuming application of IFRS to the bond issuance.

(c) Which approach provides the better accounting? Explain.

The information below pertains to Barkley Company for 2018.

Net income for the year \(1,200,000

7% convertible bonds issued at par (\)1,000 per bond); each bond is convertible into

30 shares of common stock 2,000,000

6% convertible, cumulative preferred stock, \(100 par value; each share is convertible

into 3 shares of common stock 4,000,000

Common stock, \)10 par value 6,000,000

Tax rate for 2018 40%

Average market price of common stock \(25 per share

There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 75,000 shares of common stock at \)20 per share.

Instructions

(a) Compute basic earnings per share for 2018.

(b) Compute diluted earnings per share for 2018

Ferraro, Inc. established a stock-appreciation rights (SARs) program on January 1, 2017, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of \(20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be \)4 on December 31,2017, and $9 on December 31, 2018. Compute Ferraro’s compensation expense for 2017 and 2018.

All of the following are key similarities between GAAP and IFRS with respect to accounting for dilutive securities and EPS except:

(a) the model for recognizing stock-based compensation.

(b) the calculation of basic and diluted EPS.

(c) the accounting for convertible debt.

(d) the accounting for modifications of share options, when the value increases.

Bedard Corporation reported net income of \(300,000 in 2017 and had 200,000 shares of common stock outstanding throughout the year. Also outstanding all year were 45,000 options to purchase common stock at \)10 per share. The average market price of the stock during the year was $15. Compute diluted earnings per share.

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