At December 31, 2016, Jack Russell Ltd.had 900,000 common shares outstanding (no preferred shares issued).On September 1, 2017, an additional 300,000 common shares were issued.In addition, Jack Russell had $10,000,000 (par value)6% convertible bonds outstanding at December 31, 2016, which are convertible into 600,000 common shares.No bonds were converted in 2017.Net income for calendar 2017 was $3,750,000.Assuming the income tax rate is 30%, the diluted earnings per share for 2017 is

Question

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First, we need to calculate the weighted average number of common shares outstanding, considering the additional 300,000 common shares issued in September.

Weighted average common shares outstanding = [(900,000 x 4/12) + (1,200,000 x 8/12)] = 1,050,000

Next, we need to calculate the potential dilution from the convertible bonds:

Potential dilution from convertible bonds = [(10,000,000/1,000) x 6%] / $50 (market price per share) = 120,000

Since no bonds were converted in 2017, the total number of potential dilutive common shares is 120,000.

The diluted weighted average number of common shares outstanding = 1,050,000 + 120,000 = 1,170,000

Diluted earnings per share = Net income / Diluted weighted average number of common shares outstanding

Diluted earnings per share = $3,750,000 / 1,170,000 = $3.21

However, we also need to consider the tax impact of the interest expense on the convertible bonds. The interest on the bonds is tax-deductible, so the company's tax liability is reduced. This means that the net income available to common shareholders is higher than $3,750,000.

Interest expense on 6% convertible bonds = ($10,000,000 x 6%) = $600,000

Tax savings from interest expense = ($600,000 x 30%) = $180,000

Adjusted net income available to common shareholders = $3,750,000 + $180,000 = $3,930,000

Adjusted diluted earnings per share = $3,930,000 / 1,170,000 = $3.35

However, the convertible bonds also have a dilutive effect on the earnings per share. Since the bonds are convertible into common shares, the potential dilution needs to be factored in.

The potential dilution from the convertible bonds is 120,000 shares. Dividing the adjusted net income by the diluted weighted average number of common shares gives us the diluted earnings per share:

Diluted earnings per share = $3,930,000 / (1,170,000 + 120,000) = $2.61

Therefore, the answer is choice B, $2.61.