Waseca Company had 5 convertible securities outstanding during all of 2019. It paid the appropriate interest (and amortized any related premium or discount using the
Additional data:
Net income for 2019 totaled $119,460. The weighted average number of common shares outstanding during 2019 was 40,000 shares. No share options or warrants arc outstanding. The effective corporate income tax rate is 30%.
Required:
- 1. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share.
- 2. Prepare a ranking of the order in which each of the convertible securities should be included in diluted earnings per share.
- 3. Compute basic earnings per share.
- 4. Compute diluted earnings per share.
- 5. Indicate the amount(s) of the earnings per share that Waseca would report on its 2019 income statement.
1. and 2.
Prepare a schedule to show the impact of the assumed conversion of each convertible security on diluted earnings per share and also show the manner by which the securities that are included in the diluted earnings per share are ranked.
Explanation of Solution
Earnings per share (EPS):
The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).
Prepare a schedule to show the impact of the assumed conversion of each convertible security on diluted earnings per share.
Convertible security | Impact in $ | Ranking |
10.2% bonds (1) | $2.55 | 5 |
12.0% bonds (3) | $1.71 | 3 |
9.0% bonds (5) | $1.51 | 2 |
8.3% preferred stock (6) | $2.13 | 4 |
7.5% preferred stock (7) | $1.25 | 1 |
(Table 1)
Working notes:
(1) Calculate the impact of the 10.2% bonds on diluted earnings per share.
(2) Calculate the Premium on amortized bond for 20 year life:
(3) Calculate the impact of the 12.0% bonds on diluted earnings per share.
(4) Calculate the discount on amortized bond for 10 year life:
(5) Calculate the impact of the 9.0% bonds on diluted earnings per share.
(6) Calculate the impact of the 8.3% preferred stock on diluted earnings per share.
(7) Calculate the impact of the 7.5% preferred stock on diluted earnings per share.
3. and 4.
Calculate the basic earnings per share and diluted earnings per share.
Explanation of Solution
(Figure 1)
Working notes:
(8) Calculate the numerator for the basic earnings per share:
5.
Identify the amount that will be reported as basic and diluted earnings per share for the year 2019.
Explanation of Solution
The Company W must report an amount of $2.40 as basic earnings per share and $2.20 as diluted earnings per share in its 2019 income statement.
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Chapter 16 Solutions
INTERM.ACCT.:REPORTING...-CENGAGENOWV2
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- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning