Question

faucet Company has 2,500,000 shares of common stock outstanding on December 31, year 1. An additional 500,000 shares of common stock were issued on April 1, year 2, and 250,000 more on July 1, year 2. On October 1, year 2, Faucet issued 5,000, $1,000 face value, 7% convertible bonds. Each bond is convertible into 40 shares of common stock. No bonds were converted into common stock in year 2. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, for the year ended December 31, year 2?

Answer 1

3,000,000 and 3,050,000.3,000,000

To determine the number of shares used for the calculation of basic earnings per share (BEPS) and diluted earnings per share(DEPS), first determine the weighted-average shares outstanding.

1/1/Y2 Outstanding 2,500,000

4/1/Y2 Issuance (500,000 OS × ¾ of year) 375,000

7/1/Y2 Issuance (250,000 OS × ½ of year)125,000

Total 3,000,000

For DEPS the bonds would be considered converted. Since there were 5,000 bonds, each convertible into 40 shares of stock, this results in an additional 50,000 equivalent shares (5,000 × 40 × 3/12 yr.). Thus, there would be 3,000,000 shares outstanding for BEPS and 3,050,000 shares outstanding forDEPS.