On December 31,2013,Freulein Company had 8,000 shares of common stock issued and outstanding.On April 1,2014,an additional 1,500 shares of common stock were issued and on July 1,500 more shares were issued.On October 1,2014,Freulein issued 10,$1,000 maturity value,8% convertible bonds.Each bond is convertible into 40 shares of common stock.No bonds were converted into common stock in 2014.Assuming there are no antidilutive securities,what is the number of shares Freulein should use to compute diluted earnings per share for the year ended December 31,2014?
A) 9,325
B) 9,475
C) 9,525
D) 9,775

Question

Quizplus · Accepted Answer

To calculate the diluted earnings per share (EPS), we need to consider the potential shares that could be issued from convertible securities, in addition to the weighted average of shares outstanding during the year. 1. Start with the initial 8,000 shares.2. Add the 1,500 shares issued on April 1, which counts for 9/12 of the year: 1,500 * (9/12) = 1,125.3. Add the 500 shares issued on July 1, which counts for 6/12 of the year: 500 * (6/12) = 250.4. For the convertible bonds, 10 bonds can be converted into 40 shares each, totaling 400 shares. Since no bonds were converted in 2014, we add these potential shares to the calculation: 10 * 40 = 400.Summing these up: 8,000 + 1,125 + 250 + 400 = 9,775.However, the correct calculation for the potential shares from convertible bonds should not be added directly to the weighted average since no bonds were converted in 2014. The error in the explanation above is in the incorrect addition of the 400 shares from the convertible bonds directly to the weighted average of shares. The correct approach is to calculate the weighted average shares without considering the conversion of bonds, as they were not converted within the year. Therefore, the correct calculation should only include the weighted average of shares actually issued and outstanding during the year:8,000 (beginning balance) + 1,125 (for shares issued on April 1) + 250 (for shares issued on July 1) = 9,375.The inclusion of the 400 shares from the convertible bonds was a mistake in the explanation process, leading to an incorrect total. The correct answer should reflect the weighted average of shares without the addition of shares from the non-converted bonds. The correct number of shares to use for computing diluted EPS would exclude the potential shares from the convertible bonds since they were not actually converted in 2014. The oversight in the explanation led to an incorrect conclusion. The correct answer should be based on the actual shares issued and outstanding, adjusted for the timing of their issuance within the year.

On December 31,2013,Freulein Company Had 8,000 Shares of Common Stock