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Santana Corporation has 400,000 shares of common stock outstanding throughout 2018. In addition, the corporation has...

Santana Corporation has 400,000 shares of common stock outstanding throughout 2018. In addition, the corporation has 5,000, 20-year, 9% bonds issued at par in 2016. Each $1,000 bond is convertible into 20 shares of common stock after 9/23/19. During the year 2018, the corporation earned $900,000 after deducting all expenses and taxes. The tax rate was 30%.

Instructions:  Be certain to show your computations.

            

a.  Determine the primary earnings per share for 2018.

b.  Determine diluted earnings per share (if appropriate).

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Homework Answers

Answer #1

(a) -- Determine the primary earnings per share for 2018.

Answer -

Calculation of primary earnings per share

Particulars Explanation
I. Net income Given in question $900000
II. Shares of common stock outstanding Given in question 400000 shares
Primary earnings per share I / II $2.25

.

(b) -- Determine diluted earnings per share.

Answer -

= (Net income + Interest after taxes) / Shares outstanding adjusted for Dilutive Securities

= [$900000 + ($5000000 * 9%) - 30% tax] / (Shares of common stock outstanding + Conversion of dilutive securities)

= $1215000 / [400000 shares + (5000 bonds * 20 shares)]

= $1215000 / 500000 shares

= $2.43

The bonds are antidilutive, because earnings per share assuming bond conversion is $2.43, which is more than the primary earnings per share of $2.25.

Hence, Diluted earnings per share = $0, and earnings per common share outstanding of $2.25 should be reported.

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