At December 31, 2013, GHI had 400 common shares outstanding.On October 1, 2014, an additional 100 common shares were issued.In addition, GHI had $40,000 of 8 percent, convertible bonds outstanding at December 31, 2013, which are convertible into 225 common shares.No bonds were converted into common shares in 2014.Net income for the year ended December 31, 2014, was $14,000.Assuming the income tax rate was 50 percent, the diluted earnings per share for the year ended December 31, 2014 should be (rounded to the nearest cent):

Question

Quizplus · Accepted Answer

To calculate the diluted earnings per share (EPS), we first adjust the net income for the interest saved on the convertible bonds, net of tax. The annual interest on the bonds is $40,000 * 8% = $3,200. The tax saving on this interest is $3,200 * 50% = $1,600. So, the adjusted net income is $14,000 + $1,600 = $15,600.Next, we calculate the weighted average number of shares. For the first 9 months, there were 400 shares, and for the last 3 months, there were 500 shares (400 original + 100 additional). The weighted average is (400 * 9/12) + (500 * 3/12) = 300 + 125 = 425 shares. Adding the 225 shares from the convertible bonds gives a total of 650 shares.Finally, the diluted EPS is $15,600 / 650 = $24.00.

At December 31, 2013, GHI Had 400 Common Shares Outstanding