Question

On January 1, 2018, Vaughn Manufacturing issued at par $1,990,000 of 5% convertible bonds. Each $1,000...

On January 1, 2018, Vaughn Manufacturing issued at par $1,990,000 of 5% convertible bonds. Each $1,000 bond is convertible into 10 shares of common stock. No bonds were converted during 2018. Vaughn had 204,000 shares of common stock outstanding during 2018. Vaughn’s 2018 net income was $891,000 and the income tax rate was 35%. Vaughn’s diluted earnings per share for 2018 would be (rounded to the nearest penny):




Select one:

a. $4.27.

b. $4.31.

c. $4.97.

d. $4.37.

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Answer #1

Answer: a. $4.27.

Explanation

Computation of diluted earnings per share for 2018
Net Income $ 891,000.00
Add: Interest Savings (net of tax) [99,500 x (1-0.35)] $ 64,675.00
Adjusted Net Income $ 955,675.00
Bonds to be converted in to Number of shares = ($1,990,000 / $1,000) x 10 shares = 19,900 shares
Total number of shares outstanding = 204,000 + 19,900 = 223,900 shares
Diluted Earnings Per Share = $955,675 / 223,900 shares = $ 4.27
Explanation
Interest = $1,990,000 x 5% = $99,500
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