On January 2, 2018, L Co. issued at face value $20,000 of 4% bonds convertible in total into 1,000 shares of L's common stock. No bonds were converted during 2018. Throughout 2018, L had 1,000 shares of common stock outstanding. L's 2018 net income was $2,000. L's income tax rate is 50%.
No potential common shares other than the convertible bonds were outstanding during 2018.
L's diluted earnings per share for 2018 would be:
A) $1.00.
B) $1.20.
C) $1.40.
D) $2.00.

Question

Quizplus · Accepted Answer

$\text { Diluted EPS } \quad=\frac{\$ 2,000 \mathrm{NI}+\$ 800 * \times(1-0.50)}{1,000 \text { shs. }+1,000 \text { Potential shares }}$ $\begin{array}{l}
=\frac{\$ 2,400}{2,000} \
=\$ 1.20
\end{array}$ *$20,000 × 4% = $800