Terrell Foods reported $910,000 in net income (not considering interest expense) and its weighted-average shares outstanding for the year is 100,000 shares. In prior years it sold $1,500,000 of 8% long-term convertible bonds at par which are still outstanding at the start of the year. The bonds are convertible into 50,000 shares of common stock. The tax rate for all years is 40%. Bondholders convert the bonds on July 1 of the current year. If Terrell has no other potentially dilutive securities and no preferred stock, what are basic and diluted EPS? (Round your final answers to the nearest cent.)

Question

Quizplus · Accepted Answer

The correct answer is A. Basic EPS is calculated as net income divided by the weighted-average number of common shares outstanding. In this case, the basic EPS is $910,000 / 100,000 shares = $6.99. Diluted EPS is calculated as net income divided by the weighted-average number of common shares outstanding plus the number of common shares that would be issued if all convertible securities were converted. In this case, the diluted EPS is $910,000 / (100,000 shares + 50,000 shares) = $6.07.

Terrell Foods Reported $910,000 in Net Income (Not Considering Interest