On January 2, 2015, Worth Co. issued at par $1,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 20 shares of common stock. No bonds were converted during 2015. Worth had 200,000 shares of common stock outstanding during 2015. Worth's 2015 net income was $450,000 and the income tax rate was 30%. Worth's diluted earnings per share for 2015 would be (rounded to the nearest penny):

Question

Quizplus · Accepted Answer

To calculate diluted earnings per share (EPS), we first adjust net income for interest savings net of tax due to the potential conversion of bonds. The annual interest on the bonds is 7% of $1,000,000, which equals $70,000. The tax savings on this interest is $70,000 * 30% = $21,000. So, the adjusted net income is $450,000 + ($70,000 - $21,000) = $499,000. The potential conversion of bonds would increase the number of shares by 1,000,000 / $1,000 * 20 = 20,000 shares. Therefore, the total shares for diluted EPS calculation would be 200,000 + 20,000 = 220,000 shares. Diluted EPS = $499,000 / 220,000 = $2.27.