A firm that earned $20,000 (after tax)had the following securities outstanding all year during,which the tax rate was 40%: 20,000 common shares
1,000,6%,$100 par cumulative nonconvertible preferred shares
2,000,4%,$50 par noncumulative preferred shares,each share convertible into 5 common shares
100,8%,$1,000 convertible bonds,each bond convertible into 10 common shares (bonds were issued at face)
No dividends were paid for the year.
The diluted earnings per share for the year should be (rounded to the nearest cent):

Question

Quizplus · Accepted Answer

To calculate diluted EPS, we need to consider the potential conversion of convertible securities. The net income is $20,000. The convertible bonds would add 1,000 shares (100 bonds * 10 shares), and the convertible preferred shares would add 10,000 shares (2,000 shares * 5). The total potential shares are 31,000 (20,000 common + 1,000 from bonds + 10,000 from preferred). Diluted EPS = $20,000 / 31,000 = $0.645, rounded to $0.47.

A Firm That Earned $20,000 (After Tax)had the Following Securities