Nolte Co. has 4,500,000 shares of common stock outstanding on December 31, 2014. An additional 200,000 shares are issued on April 1, 2015, and 480,000 more on September 1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2015 is

Question

Quizplus · Accepted Answer

The number of shares used in computing basic earnings per share is simply the number of shares outstanding on December 31, 2015, which is:
4,500,000 + 200,000 + 480,000 = 5,180,000

To calculate diluted earnings per share, we need to take into account the potential conversion of the convertible bonds. Each $1,000 bond can be converted into 40 shares of common stock, so the potential number of additional shares that could be issued is:
($6,000,000 ÷ $1,000) × 40 = 240,000

However, because the bonds were issued on October 1, they were outstanding for only 3 months of the year. To calculate the weighted average number of shares outstanding for diluted earnings per share, we need to add only a portion of the potential shares:

5,180,000 for the first 9 months of the year
+ (240,000 ÷ 2) for the last 3 months of the year (because the bonds were outstanding for half the quarter)
= 5,170,000

Therefore, the number of shares to be used in computing diluted earnings per share is 5,170,000, which is answer choice B.

Nolte Co Has 4,500,000 Shares of Common Stock Outstanding on December