In: Accounting
On January 1, 2020, Sweet Company issued 10-year, $2,020,000
face value, 6% bonds, at par. Each $1,000 bond is convertible into
16 shares of Sweet common stock. Sweet’s net income in 2020 was
$475,300, and its tax rate was 20%. The company had 97,000 shares
of common stock outstanding throughout 2020. None of the bonds were
converted in 2020.
(a) Compute diluted earnings per share for 2020.
(Round answer to 2 decimal places, e.g.
$2.55.)
Diluted earnings per share |
$. |
(b) Compute diluted earnings per share for 2020,
assuming the same facts as above, except that $970,000 of 6%
convertible preferred stock was issued instead of the bonds. Each
$100 preferred share is convertible into 5 shares of Sweet common
stock. (Round answer to 2 decimal places, e.g.
$2.55.)
Diluted earnings per share |
$. |
Solution
a) Calculaton of Diluted Earning Per Share for 2020 :
Diluted Earning Per Share = Adjusted Income After Dilution / Total outstsanding Shares After Dilution
Here,
Adjusted Income After Dilution = Net Income + Interest Saving (Net of Tax)
= 475,300 + [ (2,020,000 * 6%) * (1-20%) ]
= 475,300 + 121,200*0.8
= 475,300 + 96,960
= $572,260
Total Outstanding Shares = Shares Outstanding During year + Diluted Shares
= 97,000 Shares + [($2,020,000 / $1000) * 16 Shares]
= 97,000 Shares + 32,320 Shares
= 129,320 Shares
Therefore,
Diluted EPS = $ 572,260 / 129,320 Shares
= $ 4.43
b)
Diluted Earning Per Share = Adjusted Income After Dilution / Total outstsanding Shares After Dilution
Here,
Adjusted Income After Dilution =$ 475,300 (As there is no Interest)
Total Outstanding Shares = Shares Outstanding During year + Diluted Shares
= 97,000 Shares + [($ 970,000 / $100) * 5 Shares]
= 97,000 Shares + 48,500 Shares
= 145,500 Shares
Therefore,
Diluted EPS = $ 475,300 / 145,500 Shares
= $ 3.27