On January 1, 2020, Cullumber Company issued 10-year, $1,810,000 face value, 6% bonds, at par. Each...

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On January 1, 2020, Cullumber Company issued 10-year, $1,810,000 face value, 6% bonds, at par. Each $1,000 bond is convertibl

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Answer 1

Answer #1

a)

Diluted EPS = net income after conversion /number of shares after conversion

= $490080/123150 shares

= $3.98 per share

Note 1: Net income after conversion = net income before conversion + interest expense after tax effect.

= $403200 + [($1810000 × 6%)×(1-0.2)]

= $403200 + [$108600×0.8]

= $403200 + $86880

= $490080

Note 2: Number of shares after conversion = shares before conversion + new shares of conversion

= 96000 + [($1810000/$1000)×15]

= 96000 + [1810×15]

= 96000 + 27150

= 123150 shares

b)

Diluted EPS = net income before preference dividend /number of shares after conversion.

= $460800/240000 shares

= $1.92 per share

Note 3 : Net income before preference dividend = net income after preference dividend + preference dividend

= $403200 + $960000×6%

= $403200 + $57600

= $460800

ASSUMPTION : For (b), it is assumed that net income of $403200 is after preference dividend.

If it is assumed as before preference dividend then diluted EPS would be

= $403200/240000 shares

= $1.68 per share

Note 4 : Number of shares after conversion = shares before conversion + new shares of conversion

= 96000 + [$960000/$100)×15]

= 96000 + [9600×15]

= 96000 + 144000

= 240000 shares

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Answer 2

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