Question

Question 6 --/1 View Policies Current Attempt in Progress Amy Dyken, controller at Teal Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Teal's financial statements. Below is selected financial information for the fiscal year ended June 30, 2020. Teal Pharmaceutical Industries Selected Balance Sheet Information June 30, 2020 Long-term debt Notes payable, 9% 7% convertible bonds payable 9% bonds payable $1,010,000 5,070,000 6,120,000 $12.200.000 Total long-term debt Shareholders' equity Preferred stock, 5% cumulative, $50 par value, 104,000 shares authorized, 26,000 shares issued and outstanding $1,300,000 Common stock, $1 par, 9,900,000 shares authorized, 990,000 shares issued and outstanding 990,001 Additional paid-in capital 4,010,001 Retained earnings 5,950,001 Total shareholders' equity $12,250,001

Answer 1

Answer -

(a) Answer -

Basic earnings per share = $1.43

Calculation :

Preferred dividend = $1300000 * 5% = $65000

Basic earnings per share = (Net income - Preferred dividend) / Weighted average common shares outstanding

Basic earnings per share = ($1480000 - $65000) / 990000

Basic earnings per share = $1.4292

(b) Answer -

Diluted earnings per share = $1.31

Calculation :

Need to see convertible bonds and stock options fit the test of dilution.

So,

7% convertible bonds :

Interest on convertible bonds

= $5070000 * 7% - Income tax (20%)

= $354900 - Income tax (20%)

= $283920

Converted common shares

= ($5070000 / $1000) * $50

= $253500

7% convertible bonds = Interest on convertible bonds / Converted common shares

7% convertible bonds = $283920 / 253500

7% convertible bonds = $1.12

Since,

Basic earnings per share ($1.43) is greater than 7% convertible bonds ($1.12)

So, it can be said that the 7% convertible bonds are dilutive.

Stock options :

Since the average market price $20 per share is greater than option price $14 per share.

So, the stock options are dilutive.

Incremental shares = [(Market price - Option price) / Market price] * No. of options

Incremental shares = [($20 - $14) / $20] * 190000

Incremental shares = 57000

Potentially dilutive common shares = Converted common shares + Incremental shares

Potentially dilutive common shares = 253500 + 57000

Potentially dilutive common shares = 310500

Diluted earnings per share :

Diluted earnings per share = (Net income - Preferred dividend + Interest on convertible bonds) / (Average common shares + Potentially dilutive common shares)

Diluted earnings per share = ($1480000 - $65000 + $283920) / (990000 + 310500)

Diluted earnings per share = $1.3063