Terrell Foods reported $950,000 in net income and its weighted average shares outstanding for the year is 200,000 shares.In prior years it sold $2,000,000 of 8% long-term bonds at par which are still outstanding.The bonds are convertible into 50,000 shares of common stock.The tax rate for all years is 40%.If Terrell has no other potentially dilutive securities and no preferred stock,what are basic and diluted EPS?

Question

Quizplus · Accepted Answer

The correct answer is A because the basic EPS is calculated by dividing the net income by the weighted average shares outstanding, which is $950,000 / 200,000 = $4.75. The diluted EPS is calculated by adding the potential shares from the convertible bonds to the weighted average shares outstanding, which is 200,000 + 50,000 = 250,000 shares. Then, dividing the net income by the diluted shares outstanding, we get $950,000 / 250,000 = $4.18.

Terrell Foods Reported $950,000 in Net Income and Its Weighted