Question

At December 31, 2018, the financial statements of Hollingsworth Industries included the following:

Net income for 2018	$	510	million
Bonds payable, 10%, convertible into 39 million shares of common stock	$	400	million
Common stock:
Shares outstanding on January 1		500	million
Treasury shares purchased for cash on September 1		36	million

Additional data:
The bonds payable were issued at par in 2016. The tax rate for 2018 was 40%.

Required:
Compute basic and diluted EPS for the year ended December 31, 2018.

Answer 1

	Basic earnings per share:-
=	[(Net Income - Preferred Dividends)/Weighted average common shares outstanding)]
=	[(510- 0) / 488)
=	$1.05
	Weighted average common shares outstanding
	Date	Amount	Fraction	Shares
	1/1-12/31	500.00	(12/12)	500.00
	9/1-12/31	(36.00)	(4/12)	(12.00)
				488.00
	Diluted earnings per share:-
=	(Net Income - Preferred Dividends + After tax interest on Bonds) / (Weighted average common shares outstanding+ Potentially dilutive common shares)
=	(510 - 0 + 24) / (488+39)
=	(534 / 527)
=	$1.01
	After tax Interest on Convertible Bonds = (400*10% *(100%-40%) = 24
	Test for Dilution:-
	Convertible Bond = (24) / 39) = $0.62
	Since $0.62 is less than the basic EPS i.e. $ 1.05, hence Convertible Bond is considered as dilutive, hence will be included in the calculation of diluted earning per share.
	Hence, Potentially dilutive common shares = 39 million shares