Question

P6.  On December 31, 2019, Hawk Company presented the following data.

• Net income after income tax and interest expenses $2,400,000.
• Common stock (C/S)with $100 par:

# of shares outstanding as of 1/1/2019                                     1,000,000

             # of shares issued for cash on 9/1/2019                                     600,000

            # of shares reacquired on 11/1/2019 (Tresury stocks)              200,000

• 200,000 shares of 3% Convertible Preferred stock (P/S) with $200/share par value.

Conversion ratio to C/S  is 2 for 1; i.e., 1 share of P/S will become 2 share of C/S        

• The income tax rate is 30%.
• Hawk issued 3,000 shares of $1,000 par value, 2%, 5 year convertible bonds for $1,000 per share on January 1, 2018. The interests are payable annually at the end of each year. Each $1,000 bond can be converted to 10 shares of common stock within five years from 1/1/2019.
• None of these convertible securities have been converted to date.
• Hawk granted call options to purchase 10,000 shares of common stock for $80/share to its managers on 1/1/2019 when the option value were $5,000. None of these options have been exercised to date. The average market price of common stock was $120/share in 2019.

Instructions:

1. Compute Simple EPS for 2019.
2. Compute Diluted EPS for 2019.
3. This is independent of  1) and 2). Presume that all convertible bonds were converted to common stock on 12/31/2019 when the market value of common stock was $110/ share.  Prepare journal entries for the conversion using the market value method.

Answer 1