At December 31,2013,BCD had 700 common shares outstanding.On September 1,2014,an additional 300 common shares were issued.In addition,BCD had $20,000 of 8 percent convertible bonds outstanding December 31,2013,which are convertible into 400 common shares.No bonds were converted into common shares in 2014.Net income for the year ended December 31,2014,was $6,000.Assuming the income tax rate was 50 percent,what should be the diluted earnings per share for the year ended December 31,2014?

Question

Quizplus · Accepted Answer

To calculate the diluted EPS, we need to assume conversion of the convertible bonds and issuance of additional shares.

First, let's calculate the new number of shares assuming conversion of the bonds:
Number of shares = 700 + (400 convertible bonds × 1 convertible bond/1 share) = 1,100 shares

Next, we need to calculate the weighted average number of shares outstanding for dilution purposes:

Weighted average shares = [(700 shares × 8/12 months) + (1,000 shares × 4/12 months)] = 766.67 shares

Now, we can calculate the diluted EPS:

Diluted EPS = (Net Income - Preferred Dividends) / Weighted Average Shares

No preferred dividends given, so we can use net income in the formula:

Diluted EPS = ($6,000 × (1-50%)) / 766.67 = $3,000 / 766.67 = $3.92 per share

Therefore, the diluted EPS is $3.92 per share, and the best choice is B ($5.67) which is not an option.

At December 31,2013,BCD Had 700 Common Shares Outstanding