Question

(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

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

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

 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