Question

On January 1, 2020, Ivanhoe Inc. issued $2.05 million of face value, five–year, 7% bonds at par. Each $1,000 bond is convertible into 14 common shares. Ivanhoe’s net income in 2020 was $249,000, and its tax rate was 35%. The company had 94,000 common shares outstanding throughout 2020. None of the bonds were exercised in 2020. For simplicity, ignore the requirement to record the bonds’ debt and equity components separately.

(a) Calculate diluted earnings per share for the year ended December 31, 2020. (Round answer to 2 decimal places, e.g. 15.25.)

Diluted earnings per share

$enter Diluted earnings per share in dollars

(b) Calculate diluted earnings per share for 2020, assuming the same facts as above, except that $1.7 million of 7% cumulative convertible preferred shares was issued instead of the bonds. Each $100 preferred share is convertible into 4 common shares. (Round answer to 2 decimal places, e.g. 15.25.)

Diluted earnings per share

$enter Diluted earnings per share in dollars

  

Answer 1

a)

Net Income	$249,000
Add- Savings in Ineterest(net of tax)[$2,050,000 x 7% x (1-35%)]	$93,275
Adjusted net income	$342,275
Common stock outstanding	94,000
Add- Bonds convertible into shares(2,050,000 / 1,000 x 14)	28,700
Shares outstanding adjusted	122,700

Diluted Earnings Per Share = Adjusted net income / Shares outstanding adjusted

= 342,275 / 122,700

= $ 2.79 per share

b)

Net Income	$249,000
Common stock outstanding	94,000
Add- Shares assumed to be issued(1,700,000/ 100 x 4)	68,000
Shares outstanding adjusted	162,000

Diluted Earnings Per Share = Adjusted net income / Shares outstanding adjusted

= 249,000 / 162,000

= $1.54 per share

Note - Preferred shares have been assumed to be converted into common stock. So, preferred dividends have not been deducted from net income.