At December 31, 2016, Marion Inc.had 6,000,000 common shares outstanding.An additional 1,000,000 common shares were issued on April 1, 2017, and 500,000 more on July 1, 2017.On October 1, 2017, Marion issued 25,000, $1,000 par value, 8% convertible bonds.Each bond is convertible into 20 common shares.No bonds were converted in 2017.What is the number of shares to be used in calculating 2017 basic earnings per share and diluted earnings per share, respectively?

Question

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Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period.

For the period January 1 - March 31, 2017: 
6,000,000 shares x 3/12 = 1,500,000 shares outstanding 
For the period April 1 - June 30, 2017: 
7,000,000 shares x 3/12 = 1,750,000 shares outstanding 
For the period July 1 - September 30, 2017: 
7,500,000 shares x 3/12 = 1,875,000 shares outstanding 
For the period October 1 - December 31, 2017: 
7,525,000 shares x 3/12 = 1,881,250 shares outstanding

Total weighted average number of common shares outstanding in 2017: 
1,500,000 + 1,750,000 + 1,875,000 + 1,881,250 = 7,006,250

Diluted earnings per share takes into account potential dilution from convertible securities. In this case, the convertible bonds would have a dilutive effect if the shares that would result from conversion would be less than the current market price per share.

Since the bonds were issued on October 1, 2017 and no bonds were converted in 2017, we only need to consider the potential dilution from the bonds in the fourth quarter.

Each bond is convertible into 20 common shares, so the potential number of additional shares from conversion is: 
25,000 bonds x 20 shares/bond = 500,000 shares

However, we must adjust for interest expense and taxes that would no longer be incurred if the bonds were converted. If those amounts were to be included, it would result in the conversion being dilutive, and the shares from conversion would be included in the diluted EPS calculation.

Without this adjustment, the conversion would be anti-dilutive, and the potential shares from conversion would not be included in the diluted EPS calculation.

Therefore, in this case, the number of shares to be used in calculating diluted EPS is the same as for basic EPS: 7,006,250.

The answer is B: 7,000,000 and 7,125,000