On January 1,2018,Alice Corporation had 20,000 shares of $6 par value common stock and 10,000 shares of 8%,$100 par value convertible preferred stock outstanding.The preferred shares carried a 3-for-1 conversion privilege.As of December 31,2018,none of the preferred shares had been converted.What number of shares must Alice use in computing diluted earnings per share at December 31,2018?

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In computing diluted earnings per share, the company assumes the conversion of the convertible preferred stock into common stock. Since each preferred stock can be converted into three common stocks, the potential number of additional common shares if all of the preferred shares were converted is 30,000 (10,000 preferred shares x 3 = 30,000 additional common shares). Therefore, the diluted EPS calculation should include both the existing common shares (20,000) and the potential additional shares from the conversion of the preferred shares (30,000), for a total of 50,000 shares.

On January 1,2018,Alice Corporation Had 20,000 Shares of $6 Par