Yoder, Incorporated, has 3,600,000 shares of common stock outstanding onDecember 31, 2014. An additional 800,000 shares of common stock were issued onApril 1, 2015, and 400,000 more on July 1, 2015. On October 1, 2015, Yoder issued 20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2015. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively?

Question

Quizplus · Accepted Answer

The number of shares to be used in computing basic earnings per share is 4,400,000 (3,600,000 + 800,000 + 400,000).

To compute diluted earnings per share, we need to add the potential common shares from the conversion of the bonds. Each bond is convertible into 20 shares of common stock, and there are 20,000 bonds outstanding. Therefore, the potential common shares from the conversion of the bonds are 400,000 (20 shares/bond x 20,000 bonds).

Adding this to the basic EPS shares, we get: 
4,400,000 (basic EPS shares) + 400,000 (potential common shares from conversion of bonds) = 4,800,000 shares to be used in computing diluted earnings per share.

Yoder, Incorporated, Has 3,600,000 Shares of Common Stock Outstanding OnDecember