Question

Computing Diluted EPS: Convertible Bonds and Convertible Preferred Stock

Jones Corporation's capital structure follows.

December 31	2020
Outstanding shares of stock
Common stock, outstanding shares	242,000
Convertible preferred stock, outstanding shares	22,000
8% Convertible bonds	$2,200,000

During 2020, Jones declared and paid dividends of $3.00 per share on its preferred stock. The preferred shares are convertible in 44,000 shares of common stock. The 8% bonds are convertible into 66,000 shares of common stock. Net income for 2020 is $1,955,000. Assume that the income tax rate is 25%.

Required

a. Compute basic EPS for 2020.

b. Compute diluted EPS for 2020.

• Note: Round earnings per share amounts to two decimal places.

	Net Income Available to Common Stockholders	Weighted Avg. Common Shares Outstanding	Per Share
Basic EPS	Answer	Answer	Answer
Diluted EPS	Answer	Answer	Answer

Answer 1

Answer:

a) Computation of EPS for 2020:

Basic EPS = (Earning available for equity shareholders / Weighted average common share outstanding)

= $1,889,000 / 242,000

= 7.81 Per share.

Note-1

Earning available for equity shareholders=( Net Income - Dividend on preferred stock)

= ($1,955,000 - $66,000)

= $1,889,000

Note-2  Assume Net Income provided above is after tax.

b) Computation of diluted EPS for 2020:

Basic EPS = (Earning available for equity shareholders / Weighted average common share outstanding)

= $2,087,000/ 352,000

= 593 Per-share.

Earning available for equity shareholders:

Particulars	Amount
Net Income after dividend	$1889000
Add: Interest on the debt (2,200,000x 8%) (1-25%)	$132,000
Add: Preference Dividend	$66,000
Total	$2,087,000

The weighted average common share outstanding

Particulars	No. of shares
No. of common stock	242,000
No. of convertible preference shares	44,000
No. of the convertible debenture	66,000
Total	352,000

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