Question

In: Accounting

In 2016, Ivanhoe Ltd. issued $51,000 of 7% bonds at par, with each $1,000 bond being...

In 2016, Ivanhoe Ltd. issued $51,000 of 7% bonds at par, with each $1,000 bond being convertible into 100 common shares. The company had revenues of $70,200 and expenses of $39,500 for 2017, not including interest and taxes (assume a tax rate of 20%). Throughout 2017, 1,000 common shares were outstanding, and none of the bonds were converted or redeemed. (For simplicity, assume that the convertible bonds’ equity element is not recorded.)

Calculate diluted earnings per share for the year ended December 31, 2017.

Calculate diluted earnings per share for the year ended December 31, 2017. Assume that the 51 bonds were issued on October 1, 2017 (rather than in 2016), and that none have been converted or redeemed.

Calculate diluted earnings per share for the year ended December 31, 2017. Assume that 15 of the 51 bonds were converted on July 1, 2017.

Solutions

Expert Solution

Calculation of Total Income

Revenue - $ 70,200

Expenses - $ 39,500

Income Before Interest and tax = $ 30,700

Less: Interest ($51,000 x 7%) $ 3,570

Income Before Tax = $ 27,130

Tax (20%) $ 5,426

Total Income = $ 21,704

1. Diluted earning per share for the year ended December 31,2017

Diluted EPS = Total Income / (Outstanding Shares + Diluted shares)

= $ 21,704 / 1000

= $21.70

2. Diluted earning per share for the year ended December 31,2017 if Bonds issued on October 1, 2017

Income Before Interest and Tax = $ 30,700

Less: Interest ($51,000 x 7% x 3/12) = $ 892.50

Income Before Tax = $ 29,807.5

Tax (20%) $ 5,961.5

Total Income = $ 23,846

Diluted EPS = Total Income / (Outstanding Shares + Diluted shares)

= $ 23,846 / 1000

= $23.85

3. Diluted earning per share for the year ended December 31,2017 if 15 of the 51 Bonds converted on July 1, 2017

Income Before Interest and Tax = $ 30,700

Less: Interest ($36,000 x 7% ) = $ 2,520

Less: Interest ($ 15,000 x 7% x 6/12) = $ 525

Income Before Tax = $ 27,655

Tax (20%) $ 5,531

Total Income = $ 22,124

Diluted EPS = Total Income / (Outstanding Shares + Diluted shares)

Diluted Shares = 1500 shares ( 1Bond = 100 shares, therefore 15 bonds = 1500 shares)

= $ 22,124 / (1000 + 1500)

= $22,124 / 2500

= 8.85


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