Question

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 5% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income for 2018 was $600,000 and the income tax rate was 30%. Reference: Ref 16-5 Diluted earnings per share for 2018 is (rounded to the nearest penny) Group of answer choices

a. $2.29.

b. $2.12.

c. $2.08.

d. $2.50.

Answer 1

Answer:

Option (a) is correct.

Explanation:

Convertible preferred stock:

Numerator effect = 20,000 shares × $3

                             = $60,000

Denominator effect = 40,000 shares

Overall effect = $60,000 ÷ 40,000

                       = $1.50

Convertible bonds:

Numerator effect = $1,500,000 × 5% × (1 - 0.30)

                             = $52,500

Denominator effect = ($1,500,000 ÷ $1,000) bonds × 30 shares

                                 = 45,000 shares

Overall effect = $52,500 ÷ 45,000

                       = $1.17

Tentative diluted EPS with only convertible bonds effect:

= [$600,000 - (20,000 × $3) + $52,500] ÷ (200,000 + 45,000)

= $592,500  ÷ 245,000

= $2.42

Effect of convertible preferred:

= [$592,500 + $60,000] ÷ (245,000 + 40,000)

= $2.29

Answer 2

The diluted earnings per share for 2018 is $2.29.

Convertible preferred stock:

Numerator effect = 20,000 shares * $3

Numerator effect = $60,000

Denominator effect = 40,000 shares

Overall effect = Numerator effect / Denominator effect

Overall effect = $60,000 / 40,000

Overall effect = $1.50

Convertible bonds:

Numerator effect = $1,500,000 * 5% * (1 - 0.30)

Numerator effect = $1,500,000 * 5% * 0.70

Numerator effect = $52,500

Denominator effect = ($1,500,000/$1,000) bonds *  30 shares

Denominator effect = 45,000 shares

Overall effect = Numerator effect / Denominator effect

Overall effect = $52,500 ÷ 45,000

Overall effect = $1.17

Tentative diluted EPS with only convertible bonds effect:

= [$600,000 - (20,000*$3) + $52,500] / (200,000 + 45,000)

= $592,500 / 245,000

= $2.42

Effect of convertible preferred = [$592,500 + $60,000] / (245,000 + 40,000)

Effect of convertible preferred = $652,500 / $285,000

Effect of convertible preferred = $2.29

Therefore, the diluted earnings per share for 2018 is $2.29.

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