Question

(EPS with Convertible Bonds) On June 1, 2012, Bluhm Company and Amanar Company merged to form Davenport Inc. A total of 800,000 shares were issued to complete the merger. The corporation reports on a calendar year basis.

On April 1, 2014, the company issued an additional 600,000 shares of stock for cash. All 1,400,000 shares were outstanding on December 31, 2014.

Davenport Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2014. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date.

Davenport Inc is preparing its annual report for the fiscal year ending December 31, 2014, and will report earnings per share figures based upon a reported after-tax net income of $1,540,000. The tax rate is 40%.

Instructions

Determine the following for 2014.

(a) The number of shares to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share.

(b) The earnings figures to be used for calculating:

(1) Basic earnings per share.

Diluted earnings per share(2)

Answer 1

ANSWER

Part a.1

The share used for basic earnings per share is $1,250,000.

Part a.2

The number of shares used for the diluted earnings per share is $1,262,000.

Part b.1

The net income of $1,540,000 is reported as the earning per share.

Part b.2

The earning figure to be used for diluted earnings per share is $1,554,400.

Explanation;-

b.1)

The net income of $1,540,000 is reported as the earning per share figure after the tax at the year ending of December 31, 2014.

b.2)

Calculate Earning figure to be used for diluted earnings per share:

Therefore earning figure to be used for diluted earnings per share is $1,554,400.

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