Question

During 2021, A Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. A Corp. declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2021. On January 1, 2020, A Corp. issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares.A's net income for the year ended December 31, 2021, was $6 million. The income tax rate is 20%. What will A Corp. report as diluted earnings per share for 2021, rounded to the nearest cent?

Answer 1

Answer:

$6.52

Explanation:

The computation of the diluted earning per share is shown below:

Diluted earning per share = Earning  ÷ Total number of shares

But before that we need to find out the convertible shares

No. of shares convertible

= ($2,000,000 ÷ $1,000) x 5

= 10,000 shares

Now

Total shares = 900,000 + 10,000 = 910,000 shares

And,

Interest net of tax = 2,000,000 × 5% × (1 - 0.20) = $80,000

So,

Earnings = 6,000,000 + 80,000 - 150,000

= $5,930,000

Therefore the diluted earning per share is

= $5,930,000 ÷ 910,000 shares

= $6.52

We simply applied the above formula