90.2K

Verified Solution

Link Copied!

Question is above the solution. Can someone please explain how you work out the numbers in the solution.

Can I please have a thorough explanation answer is below!

epsextrabondconv
Bond facts
	Face amount	1,500,000
	Face rate	12%
	1/1 and 7/1 interest payments
	Proceeds from issuance	1,466,000
	Discount amortized using straight line
	Issue date	7/1/04
	10 year term
	Each $1,000 bond convertible into 8 shares of $100 par common
	On 8/1/2005 $150,000 bonds were converted into common. Accrued interest on the converted
	bonds was paid at conversion
Additional facts needed are as follows:
	Net income for 2005	6,000,000
	Tax rate	40%
	Common stock outstanding at 1/1/05	500,000
	There were no stock transactions other than the bond conversion
Calculate 2005 basic and diluted earnings per share

epsextrabondconv

Bond facts

Face amount

1,500,000

Face rate

12%

1/1 and 7/1 interest payments

Proceeds from issuance

1,466,000

this reflects a $34,000 discount

Discount amortized using straight line

Issue date

7/1/04

10 year term

Each $1,000 bond convertible into 8 shares of $100 par common

On 8/1/2005 $150,000 bonds were converted into common. Accrued interest on the converted

bonds was paid at conversion

Additional facts needed are as follows:

Net income for 2005

6,000,000

this reflects the effect of the actual conversion of $150,000 bonds on net income

Tax rate

40%

Common stock outstanding at 1/1/05

500,000

There were no stock transactions other than the bond conversion

The basic calculation is as follows:

6,000,000

=

6,000,000

=

11.99

500,000 + (150,000/1,000 * 8 shares per bond * 5/12)

500,500

The diluted calculation is as follows:

The numerator must take into account the interest that would not be incurred if the bonds were converted. Discount amortization is part of interest expense

and thus must also be taken into consideration for the appropriate periods. Interest expense and thus discount would be removed for 7/12 of the year

for the $150,000 of bonds that were converted and would be removed for the entire year for the bonds that were not actually converted but are assumed

converted in the diluted calculation

6,000,000 + ((1,350,000 *.12*.60) + (150,000 *.12*.60*7/12) + (34,000/10*1350/1500*.6) + (34,000/10* 150/1500*7/12*.60))

=

6,105,455

=

11.92

500,500 + (1,350,000/1000*8) + (150,000/1,000 * 8 * 7/12)

512,000

The denominator assumes conversion of the 150,000 bonds as of 1/1 rather than 8/1 and conversion of the remaining 1,350,000 at 1/1

Answer & Explanation Solved by verified expert

See Answer