During 2018, Pina Inc., a furniture store, issued two different series of bonds, details of which...

During 2018, Pina Inc., a furniture store, issued two different series of bonds, details of which follow:

First issue: 670 $100, 10% bonds, at par, each convertible into 6 common shares.

Second issue: 390 $100, 7% bonds, at par, each convertible into 3 common shares.

For the year ended December 31, 2020, the company had net income of $53,850. Throughout 2020, 2,500 common shares were outstanding; none of the bonds were converted or redeemed. The company’s tax rate was 19%. (For simplicity, ignore the requirement to record the debt and equity portions of the convertible bond separately).

1. Calculate basic earnings per share for the year ended December 31, 2020.

2. Calculate diluted earnings per share for the year ended December 31, 2020.

Expert Solution

1.)	Earnings for Basic Earnings per share	$ 53,850
	( Equal to Net Income )

	Shares for Basic Earnings per share	2,500

	Basic earnings per share for the year ended December 31, 2020.	$ 21.54	=53850/2500



2.)	Net Income	53,850
	Add: Interest net of tax of 10% Bonds	5,427	=67010010%*(1-19%)
	Add: Interest net of tax of 7% Bonds	2,211	=3901007%*(1-19%)
	Earnings for Diluted Earnings per share	$ 61,488

	Outstanding Common Shares	2,500
	Add: 10% bond convertible into Common Shares	4,020	=670*6
	Add: 7% bond convertible into Common Shares	1,170	=390*3
	Shares for Diluted Earnings per share	7,690


	Diluted earnings per share for the year ended December 31, 2020	$ 8.00	=61488/7690

ekkarill92 answered 3 months ago

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