Question

NEVERMIND, I UNDERSTAND, PLEASE DISREGARD QUESTION, plus the table isn't showing up, how do you delete this post?

In 2016, Kingbird Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Kingbird had revenues of $17,100 and expenses other than interest and taxes of $10,000 for 2017. (Assume that the tax rate is 40%.) Throughout 2017, 1,600 shares of common stock were outstanding; none of the bonds was converted or redeemed.

(a) Compute diluted earnings per share for 2017.

(c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017

Revenue: 17,100

Expenses:

The work and answer are already here. What I would like to know is, why 6,000 shares are being added to the number of shares outstanding for part c (when calculating diluted EPS) ? Why is not 40 bonds (not converted) times 100 (for the denominator)?

Answer 1

1. What I would like to know is, why 6,000 shares are being added to the number of shares outstanding for part c (when calculating diluted EPS) ? Why is not 40 bonds (not converted) times 100 (for the denominator)?

Ans: When Calculating Diluted EPS we should give effect to the shares that will be converted to the shares. In your Question No: C : Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017?, the 20 bonds x 100 shares are already converted that means when calculating EPS Up to Six Months total 60 bonds x 100 shares will be taken on a weighted average basis and for the remaining six months the outstanding shares will be 1600 + 2000 = 3600 on a weighted average basis and 40 bonds x 100 shares are taken on the weighted average basis for the remaining six months.

Or

In a case where are all of the bonds are redeemed in this year and only 20 bonds have been converted into shares then 20 bonds x 100 shares will be taken on an weighted average basis for the first six months and 3600 shares only will be taken on weighted average basis for the six months.

So, in the case of redemption of all bonds only this will happen.