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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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Francis Company has 20,000 shares of common stock out-standing during all of 2019. It also has two convertible securities outstanding at the end of 2019. These are:

  1. 1. Convertible preferred stock: 2,000 shares of 9.5%, $50 par, preferred stock were issued on January 2, 2019, for $60 per share. Each share of preferred stock is convertible into 3 shares of common stock. Current dividends have been declared. To date, no preferred stock has been converted.
  2. 2. Convertible bonds: Bonds with a face value of $200,000 and an interest rate of 5.7% were issued at par in 2018. Each $1,000 bond is convertible into 22 shares of common stock. To date, no bonds have been converted.

Francis earned net income of $61,500 during 2019. Its income tax rate is 30%.

Required:

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

To determine

Calculate the diluted earnings per share and also identify the earnings per share amount that Company F 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=$61,500$9,500(2,000×50×9.5%)=$52,000

(2) Calculate the number of shares increased in common shares:

Number of shares increased in common shares }=[(Number of bonds convertible into common stock)×Face value of bondValue Bonds  convertible ]=22×$200,0001,000=4,400

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

Amount of earnings on 

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