Question

# On December 31, 2011, JME Corporation had 350,000 shares of common stock outstanding. On September 1,...

On December 31, 2011, JME Corporation had 350,000 shares of common stock outstanding. On September 1, 2012, an additional 150,000 shares of common stock were issued. In addition, JME had \$10 million of 8% convertible bonds outstanding at December 31, 2011, which are convertible into 200,000 shares of common stock. Net income for 2012 was \$3 million. Assuming an income tax rate of 40%, what amount should be reported as the diluted earnings per share for 2012?

Diluted Earnings Per Share for 2012 = \$5.80 per share

Diluted Earnings Per Share = Adjusted Net Profit / Adjusted outstanding number of shares

Adjusted Net Profit = Net Income + After Tax Interest on Convertible Bonds

= \$30,00,000 + ( \$1,00,00,000 x 8% x 0.60)

= \$30,00,000 + \$4,80,000

= \$34,80,000

Adjusted outstanding number of shares = Shares outstanding + Additional Shares Issued + number convertible bonds

= 3,50,000 Shares + (1,50,000 x 4/12) + 2,00,000 Shares

= 6,00,000 Shares

Diluted Earnings Per Share = \$34,80,000 / 6,00,000 Shares

Diluted Earnings Per Share = \$5.80 per share

“ \$5.80 per share should be reported as the diluted earnings per share for 2012 “

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