Question

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

Short answer

1. Basic earnings per share $1.60
2. Diluted earnings per share $1.55

Step-by-step solution

(a) Computation of basic earnings per share for 2018

Net income	$1200000
−Preference dividend($4000000*.06)	240,000
Weighted average outstanding common shares(6,000,000/10)	600,000
Basic earnings per share for 2018	$1.60

(b) Computation of diluted earnings per share for 2018

Net income	1,200,000
−Preference dividend($4000000*.06)	240,000
+ Interest savings net of tax{($2,000,000*7%(1-4%)}.	84,000
		1,044,000
Divide: Weighted average outstanding common shares(6,000,000/10)	600,000
Potentially dilutive shares (15,000+60,000)	75,000
		675,000
Diluted earnings per share for 2018		$1.55