Question

Cool Candy Company issued 10 year $10,000,000 face value, 6% convertible bonds at par on January 1, 2018. Each bond has a par value of $1,000 with interest payable on December 31 of each year. The conversion ratio is 5:1 (5 shares of stock for each bond). No bonds have been converted into common stock. Cool’s tax rate is 20%. Net income (after tax) for 2018 was $45,000,000 and the Company has 10,000,000 common shares issued and outstanding during the entire year.

Required:

Please compute both basic and diluted earnings per share for 2018. (SHOW ALL WORK)

Answer 1

Answer:

Calculation of basic earning per share & Diluted earning per share of Cool Candy Company:

Basic earning per share = Net income / No. of common stock outstanding during the year

   = $45,000,000 / 10,000,000

= $4.50 per share

Diluted earning per share = Net income* / No. of common stock outstanding during the year**

= $45,480,000 / 10,050,000

= $4.53 per share

Notes:

1. Calculation of net income for diluted earning per share*:

Particulars	Amount
Net Income	$45,000,000
Add: Saving in interest on 6% Convertible bonds ($10,000,000 x 6% x 80%)	$480,000
Net income	$45,480,000

2. Calculation of no. of common stock outstanding during the year for the diluted earning per share**:

	No. of common stock
Common shares outstanding during the year	10,000,000
Add: Conversion of 6% Convertible bonds in common stock (10,000 x 5)	50,000
Number of common stock outstanding during the year	10,050,000