Question

The information below pertains to Johnson Company for 2021. Net income for the year $1,230,000 8% convertible bonds issued at par ($1,000 per bond); each bond is convertible into     30 shares of common stock 2,090,000 6% convertible, cumulative preferred stock, $100 par value; each share is convertible      into 3 shares of common stock 3,830,000 Common stock, $10 par value 6,110,000 Tax rate for 2021 20% Average market price of common stock $25 per share There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. JOHNSON company also has common stock options (granted in a prior year) to purchase 80,600 shares of common stock at $20 per share. (a) Compute basic earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.) Basic earnings per share $ (b) Compute diluted earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share $

Answer 1

(a) Computation of basic earnings per share for 2021.

Formula = earnings attributable to common stock holders / weighted average outstanding no of common stock

basic earnings per share = 620440/611000

= $ 1.015 or

= $ 1.02 per share. (Answer)

1. Earnings attributable to common stock holders

Net income for the year. $ 1230000

Less:- interest on bond. $ 167200

(2090000*8%)

Earnings before tax ( 12300000- 167200). $ 1062800

Less:- tax @20% (1062800*30%). $ 212560

Earnings After tax (1062800-212560). $ 850240

Less:- preferred dividend (3830000*6%). $ 229800

Earnings for common stock holders. $ 620440

(3830000*6%)

2. Common stock. = 6110000/10. = 611000 shares

(b) Computation of diluted earnings per share

• options

Increase in earnings. Nil

Number of incremental shares issued for no consideration

{80600*(25-20)/25}. 16120

Eps on Increased shares. Nil

• 8% Convertible bonds

Increase in net profit after tax attributable to common sharesholder

{ 209000*.08*(1-.20)}. $ 133760

Number of increased shares

( 2090000/1000)*30. 62700

Eps on Increased shares

(133760/62700). $ 2.13

• 6% Convertible cumulative preferred stock

Increase in profit attributable to common stock

(3830000*.06). $ 229800

Nimber of increased shares

(3830000/100)*3. 114900

Eps on Increased shares.

(229800/114900). $ 2.0

It may be noted that options are most dilutive as therir eps incremental share is nil

Hence for computation of diluted eps options will be considered first.

6% convertible preferred shares are second most dilutive

And 8 % bond are least dilutive will be considered in last.

Solutions

Computation of dilutive eps

	Net profit ($)	No of Common stock	Net profit Attributable Per share ($)	Dilutive/ Anti dilutive
As reported In basic eps	620440	611000	1.02
Options	nil	16120
	620440	627120	.99	Dilutive
Preferred shares	229800	114900
	850240	742020	1.15	Anti dilutive
8% bond	133760	62700
	984000	804720	1.22	Anti dilutive

Since dilutive eps increase when taking preferred shares and bonds into account they are ignored in calculating filuted eps.

Therefore, diluted earnings per share is $ .99 per share