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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Percy Company has 15,000 shares of common stock outstanding during all of 2019. It also has 2 convertible securities outstanding at the end of 2019. These are:

  1. 1. Convertible preferred stock: 1,000 shares of 9%, $100 par, preferred stock were issued in 2015 for $140 per share. Each share of preferred stock is convertible into 3.5 shares of common stock. The current dividends have been paid. To date, no preferred stock has been converted.
  2. 2. Convertible bonds: Bonds with a face value of $100,000 and an interest rate of 10% were issued at par on July 1, 2019. Each $1,000 bond is convertible into 35 shares of common stock. To date, no bonds have been converted.

Percy earned net income of $54,000 during 2019. Its income tax rate is 30%.

Required:

Compute the 2019 diluted earnings per share. What earnings per share amount(s) would Percy report on its 2019 income statement?

To determine

Calculate the diluted earnings per share and also identify the earnings per share amount that Company P must report in its 2019 income statement.

Explanation

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).

Calculate the diluted earnings per share.

(Figure 1)

Working notes:

(1) Calculate the numerator for the basic earnings per share:

Numerator earnings per share = Net income Preferred dividend=$54,000$9,000(1,000×100×9%)=$45,000

(2) Calculate the amount of earnings on bond interest expense savings:

Amount of earnings on bond interest expense savings} =[(Face value of bond× Interest rate)×Corporate income tax ]×Time period=[(

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