Smith Instruments reported $6,000,000 in net income for the current year. The company had $500,000 of 10% cumulative, non-convertible preferred stock outstanding all year, and issued $5,000,000 of 6% convertible bonds on June 1. Each $1,000 bond is convertible into 40 shares of common stock. 400,000 common shares were outstanding all year. Determine the denominator for both basic and diluted EPS when the tax rate is 40%.

Question

Quizplus · Accepted Answer

The basic EPS denominator is the number of common shares outstanding, which is 400,000. For diluted EPS, the convertible bonds are considered. Since the bonds were issued on June 1, they were outstanding for 7 months of the year. Therefore, the additional shares from conversion are (5,000 bonds × 40 shares/bond) × (7/12).

Smith Instruments Reported $6,000,000 in Net Income for the Current