Smith Instruments reported $6,000,000 in net income for the current year.The company had $500,000 of 10% cumulative,non-convertible preferred stock outstanding all year,and issued,$5,000,000 of 6% convertible bonds issued on June 1.Each $1,000 bond is convertible into 40 shares of common stock.200,000 common shares were outstanding all year.Determine the denominator for both basic and diluted EPS when the tax rate is 40%.

Question

Quizplus · Accepted Answer

To calculate basic EPS, we only need to consider the common shares outstanding, which are 200,000. Preferred stock is not considered as it is not dilutive.

To calculate diluted EPS, we need to consider the potential conversion of the convertible bonds into common shares. Each bond is convertible into 40 shares of common stock, and there are 5,000 convertible bonds issued, so the potential additional shares are 5,000 × 40 = 200,000.

However, the convertible bonds were issued on June 1, which means they were outstanding for 7 out of 12 months in the year. Therefore, the diluted EPS calculation needs to be adjusted based on the proportion of time the bonds were outstanding, which is (7/12).

Thus, the denominator for basic EPS is 200,000, and the denominator for diluted EPS is 200,000 + (5,000 × 40)(7/12) = 500,000.

The correct choice is C.

Smith Instruments Reported $6,000,000 in Net Income for the Current