At December 31, 2019, Jack Russell Ltd. had 900,000 common shares outstanding (no preferred shares issued). On September 1, 2020, 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, 2019, which are convertible into 600,000 common shares. No bonds were converted in 2020. Net income for calendar 2020 was $ 3,750,000. Assuming the income tax rate is 30%, the diluted earnings per share for 2020 is

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To calculate diluted earnings per share (EPS) for 2020, we first adjust the net income for the interest saved on the convertible bonds, net of tax. The annual interest on the bonds is $10,000,000 * 6% = $600,000. The tax savings on this interest is $600,000 * 30% = $180,000. Therefore, the adjusted net income is $3,750,000 + ($600,000 - $180,000) = $4,170,000.Next, we calculate the weighted average number of shares. For the first 8 months, there were 900,000 shares, and for the last 4 months, an additional 300,000 shares were issued, making it 1,200,000 shares. The weighted average is (900,000 * 8/12) + (1,200,000 * 4/12) = 1,000,000 shares.Adding the shares that could be issued for the convertible bonds gives a total of 1,000,000 + 600,000 = 1,600,000 shares.Finally, the diluted EPS is $4,170,000 / 1,600,000 = $2.60625, which rounds to $2.61.