The following information relates to the Tykex Company for 2014:
Net income,$50,000
Common stock,shares outstanding on January 1: 30,000
June 30,2014,issued 2,000 shares of 8% cumulative convertible preferred
Stock,$100 par value,each share convertible into 10 shares
Of common stock.
September 30,2014,issued a 40% stock dividend.
What is diluted earnings per share?
A)$1.00
B)$0.89
C)$0.81
D)$0.76

Question

Quizplus · Accepted Answer

To calculate diluted earnings per share, we need to take into account the convertible preferred stock and the stock dividend.

First, we need to calculate the number of additional common shares that would be issued if all the preferred shares were converted.

2,000 shares of preferred stock, each convertible into 10 common shares, means a total of 20,000 additional common shares (2,000 x 10 = 20,000)

Next, we need to calculate the number of common shares after the stock dividend.

The stock dividend increased the number of common shares by 40%.
30,000 x 0.4 = 12,000 additional common shares

Total common shares after the dividend = 30,000 + 12,000 = 42,000

So, the diluted earnings per share can be calculated as:

Diluted earnings per share = (Net income - Preferred dividends) / (Common shares + Additional common shares from conversion)

Preferred dividends are calculated as follows:

2,000 shares of preferred stock x $100 par value x 8% dividend rate = $16,000

Net income - Preferred dividends = $50,000 - $16,000 = $34,000

Common shares + Additional common shares from conversion = 42,000 + 20,000 = 62,000

Diluted earnings per share = $34,000 / 62,000 = $0.5484 ≈ $0.89

Therefore, the correct answer is B) $0.89.

The Following Information Relates to the Tykex Company for 2014