Question

E16-23 (L05) (EPS with Convertible Bonds) On June 1, 2015, Andre Company and Agassi Company merged to form Lan- caster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis. On April 1, 2017, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2017 Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2017. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date. Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2017. The annual report will show earn- ings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%) Instructions Determine the following for 2017 (a) The number of shares to be used for calculating (1) Basic earnings per share. (2) Diluted earnings per share. (b) The earnings figures to be used for calculating: (1) Basic earnings per share. (2) Diluted earnings per share.

Answer 1

a.) (i) Number of Shares incase of Basic EPS :

Dates	No. of months (A)	shares (B)	Weighted no.of shares (A x B) / 12 months
jan,1,2017 to mar,31,2017	3 months	800000	200000
april,1,2017 to dec,31.2017	9 months	1200000	900000
Total			1100000

(ii) Number of Shares incase of Dillutive EPS

Number of share = Share as per basic EPS + Potential Shares

Number of share = 1100000 + 24000

Number of share = 1124000 shares

Note : Potential Shares = 1 Convertible bond can convert into 40 shares

($600000 / $1000 = 600 bonds issued)

Poential shares = 600 bonds x 40 shares

Poential shares = 24000 shares

(b.) (i) Calculation of earning incase of Basic EPS

Earning = $ 1540000

(ii) Calculation of earning incase of Dillutive EPS

Earning = Earning as per EPS + Net saving of interest

Earning = 1540000 + [( 600000 x 8% ) x 60%]

Earning = 1540000 + 28800

Earning = 1568800

Note : in dillutive we take net saving of interest (net of tax) because there is chances in future that bond can converts into share so we dont have to paid interest and company cannot take benfit of tax on interest