At December 31,2013,Nightstyle Inc.had 190,000 shares of common stock outstanding.On October 1,2014,an additional 70,000 shares of common stock were issued for cash.Nightstyle also had 2,000,000 of 8 percent convertible bonds outstanding at December 31,2014,which are convertible into 55,000 shares of common stock.The bonds are dilutive in the 2014 earnings per share computation.No bonds were issued or converted into common stock during 2014.What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31,2014?

Question

Quizplus · Accepted Answer

The number of shares for diluted earnings per share includes the original shares, the additional shares issued during the year, and the shares that could be issued upon conversion of the convertible bonds. The original shares are 190,000. The additional shares issued on October 1 add another 70,000 shares, but since they were not outstanding for the entire year, they are weighted for the portion of the year they were outstanding (3/12 of the year). However, for simplicity and common practice, when calculating diluted EPS, we often consider the full impact of potential conversions for the entire period, thus initially considering the full 70,000 shares. The convertible bonds could be converted into 55,000 shares. Therefore, the total is 190,000 + 70,000 + 55,000 = 315,000 shares. However, the correct calculation for the additional shares should account for the time they were outstanding, which was not considered in the initial explanation. The correct approach involves calculating the weighted average of shares outstanding, considering any potential dilutive securities like convertible bonds. The mistake in the initial calculation was not properly adjusting for the time the additional shares were outstanding and incorrectly summing up the shares without considering the specific guidance for diluted EPS calculation. The correct number of shares for diluted EPS includes the original shares plus the shares that could be issued upon conversion of the bonds, correctly adjusting for any additional shares issued during the year.