Question

An excerpt from the statement of financial position of Twilight Limited follows: TWILIGHT LIMITED Selected Statement of Financial Position Information At December 31, 2020 Long-term debt Notes payable, 10% $5,000,000 4% convertible bonds payable 2,000,000 6% convertible bonds payable 3,000,000 Total long-term debt $10,000,000 Shareholders' equity $0.68 cumulative, no par value, convertible preferred shares (unlimited number of shares authorized, 600,000 shares issued and outstanding) $3,000,000 Common shares, no par value (8,000,000 shares authorized, 3,000,000 shares issued and outstanding) 25,000,000 Contributed surplus 200,000 Retained earnings 7,000,000 Total shareholders’ equity $35,200,000 Notes and Assumptions December 31, 2020 1. Options were granted/written in 2019 that give the holder the right to purchase 100,000 common shares at $8 per share. The average market price of the company’s common shares during 2020 was $14 per share. The options expire in 2028 and no options were exercised in 2020. 2. The 4% bonds were issued in 2019 at face value. The 6% bonds were issued on June 1, 2020, at face value. Each bond has a face value of $1,000 and is convertible into 100 common shares. 3. The convertible preferred shares were issued at the beginning of 2020. Each share of preferred is convertible into one common share. 4. The average income tax rate is 25%. 5. The common shares were outstanding during the entire year. 6. Preferred dividends were not declared in 2020. 7. Net income was $2,500,000 in 2020. 8. No bonds or preferred shares were converted during 2020.

Calculate the income effect of the dividends on preferred shares. Dividends on preferred shares $

Calculate basic earnings per share for 2020. (Round answer to 2 decimal places, e.g. 15.25.) Basic EPS $

Determine an incremental per share effect for $0.68 preferred shares. (Round answer to 2 decimal places, e.g. 15.25.) Potentially dilutive security Incremental Numerator Effect Incremental Denominator Effect EPS $0.68 Preferred shares $ $

Calculate the proceeds from assumed exercise of 100,000 options. Proceeds from exercise of options $ Calculate the incremental shares oustanding upon the exercise of options. The incremental shares oustanding upon the exercise of options

Calculate the after-tax interest paid on the 4% bonds. After-tax interest on 4% bonds converted $

Answer 1

Calculate the income effect of the dividends on preferred shares.
Dividends on preferred shares = 600000 x $.68	$ 408,000.00
Calculate basic earnings per share for 2020. (Round answer to 2 decimal places, e.g. 15.25.)
Basic EPS =( $2500000 - $408,000)/3,000,000	$            0.70
Determine an incremental per share effect for $0.68 preferred shares. (Round answer to 2 decimal places, e.g. 15.25.)
Potentially dilutive security	Incremental	Incremental	EPS
	Numerator Effect	Denominator Effect
$0.68 Preferred shares	$ 408,000.00	600,000.00	0.68
Calculate the proceeds from assumed exercise of 100,000 options.
Proceeds from exercise of options	800,000.00
Calculate the incremental shares oustanding upon the exercise of options.
Proceeds from exercise of options	800,000.00
Shares issued upon exercise of options	100,000.00
Shares purchasable with proceeds (Proceeds ÷ Average market price) = (800000/14)	57,142.86
The incremental shares oustanding upon the exercise of options	42,857.14
Calculate the after-tax interest paid on the 4% bonds.
After-tax interest on 4% bonds converted =  $2,000,000 x 4% x (1-25%)	$   60,000.00