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On January 1, 2017, Martinez Company issued 10-year, $2,010,000 face value, 6% bonds, at par. Each...

On January 1, 2017, Martinez Company issued 10-year, $2,010,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Martinez common stock. Martinez’s net income in 2017 was $302,000, and its tax rate was 40%. The company had 95,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

(a) Compute diluted earnings per share for 2017.

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that $950,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Martinez common stock.

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Answer #1

Answer (a)

Complutation of Adjusted Net Income

Particulars Amount ($)
Net Income in 2017 302,000
Add :Interest saving [($2,010,000 * 6%) * (1- 0.40)] 72,360
Adjusted Net Income 374,360

Computation of Adjusted shares outstanding

Particulars Amount ($)
Outstanding Shares 95,000
Add : Shares assume to be issued on conversion [($2,010,000 / $1,000) *15 shares 30,150
Adjusted shares outstanding 125,150

Diluted earnings per share for 2017= Adjusted Net Income / Adjusted shares outstanding

= $374,360 / 125,150 = $2.99 .

Answer b

Computation of Adjusted shares outstanding

Particulars Amount ($)
Outstanding Shares 95,000
Add : Shares assume to be issued on conversion [($950,000 / $100) *5 shares 47,500
Adjusted shares outstanding 142,500

Diluted earnings per share for 2017= Net Income / Adjusted shares outstanding

= $302,000 / 142,500 = $2.12

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