During 2009, M Co. had the following two classes of stock issued and outstanding for the entire year:
$\bullet$ 400,000 shares of common stock, $1 par.
$\bullet$ 2,000 shares of 4% preferred stock, $100 par, convertible share for share into common stock.
M's 2009 net income was $1,800,000, and its income tax rate for the year was 30%. In the computation of diluted earnings per share for 2009, the amount to be used in the numerator is
A)$1,792,000.
B)$1,796,000.
C)$1,800,000.
D)$1,802,400.The "if converted method" assumes that the preferred stock was converted to common stock and that preferred dividends were not distributed.Therefore, the numerator in the computation of Diluted EPS would be the net income of $1,800,000.

Question

During 2009, M Co. had the following two classes of stock issued and outstanding for the entire year: 
$\bullet$ 400,000 shares of common stock, $1 par.
$\bullet$ 2,000 shares of 4% preferred stock, $100 par, convertible share for share into common stock.
M's 2009 net income was $1,800,000, and its income tax rate for the year was 30%. In the computation of diluted earnings per share for 2009, the amount to be used in the numerator is
A)$1,792,000.
B)$1,796,000.
C)$1,800,000.
D)$1,802,400.The "if converted method" assumes that the preferred stock was converted to common stock and that preferred dividends were not distributed.Therefore, the numerator in the computation of Diluted EPS would be the net income of $1,800,000.

Quizplus · Accepted Answer

The amount to be used in the numerator in the computation of diluted earnings per share for 2009 is $1,800,000, which is M's net income for the year. The preferred stock is assumed to be converted to common stock and preferred dividends are not distributed when using the "if converted method" to calculate diluted EPS. Therefore, the choice is C.

During 2009, M Co ∙\bullet∙ 400,000 Shares of Common Stock, $1 Par

During 2009, M Co $\bullet$ 400,000 Shares of Common Stock, $1 Par