On January 2, 2020, Delila Inc. issued at par $ 10,000 6% bonds convertible into 1,000 of their common shares. No bonds were converted during 2020. Throughout 2020, Delila had 1,000 common shares outstanding (no preferred shares issued). Delila's 2020 net income was $ 6,000, and their income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2020. Delila diluted earnings per share for 2020 would be

Question

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To calculate diluted EPS, we need to consider the conversion of the bonds into common shares. As of January 2, 2020, each bond could be converted into 1 common share. Since there were $10,000 / $1,000 = 10 bonds issued, this means there were 10 x 1 = 10 potential common shares that could have been issued if all bonds were converted.

We use the treasury stock method to calculate the potential dilution:

- Since Delila's stock price is not given, we assume it is $6 per share (since net income equals $6,000 / 1,000 shares = $6 per share).
- If all bonds were converted, Delila would have 1,000 + 10 = 1,010 common shares outstanding.
- The proceeds from the bonds would be $10,000, which would be used to repurchase a portion of the outstanding shares. The number of shares repurchased would be $10,000 / $6 per share = 1,666.67 shares.
- The number of potential additional shares from the bonds is 10 - 1,666.67 / 6 = -277.78 (this negative number means that the bonds are antidilutive and should be excluded from the computation of diluted EPS).

Therefore, the diluted EPS is the same as basic EPS, which is net income divided by the number of common shares outstanding: $6,000 / 1,000 shares = $6 per share. However, since the bonds are dilutive in other stock price scenarios, the company should disclose potential dilution in their financial statements.