Question

Smile corp had 900,000 net income in 2018. The tax rate is 40%. 220,0000 shares of common stock outstanding throughout 2018.

Smile corp had the following potentially dilutive securities.

-There are 30,000 options to buy common stock at 40 a share outstanding. The market price of the common stock averaged 50 during 2018.

. During 2018, there were 40,000 shares of Cumulative convertible 7% preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into three shares of common stock.

-Smile Corp issued $1,800,000 of 8% convertible bonds at face value during 2017. Each $1,000 bond is convertible into 30 shares of common stock.

Requirements:

Compute diluted earnings per share for 2018. Complete the schedule and show all computations.

Security Net Income Adjustment Adjusted Net Income Shares Adjustment Adjusted Shares EPS

Answer 1

Security	Net Income	Adjustment	Adjusted Net Income (a)	Shares	Adjustment	Adjusted Shares (b)	EPS = a/b
Common Stock	$900,000.00	-$140,000.00	$760,000.00	220,000.00	0.00	220,000.00	$3.45
Options			$760,000.00	220,000.00	6,000.00	226,000.00	$3.36
Bond	$760,000.00	$96,000.00	$856,000.00	226,000.00	54,000.00	280,000.00	$3.06
Preferred Stock	$856,000.00	$140,000.00	$996,000.00	280,000.00	120,000.00	400,000.00	$2.49
Preferred Stock ($3.50 x 40,000)	$140,000.00
Options = [(50 – 40) ÷ 50] × 30,000	6000
Bond Interest = $2,000,000 × .08 × (1-40%)	96000
# of shares converted from bonds = $1800000/$1000 x 30 shares	54000	shares
# of shares converted from preferred stock = 40,000 x 3 shares	120,000	shares