Question

Convertible Securities and Earnings per Share Percy Company has 15,000 shares of common stock outstanding during all of 2016. It also has 2 convertible securities outstanding at the end of 2016. These are: 1. Convertible preferred stock: 1,000 shares of 9%, $100 par, preferred stock were issued in 2015 for $140 per share. Each share of preferred stock is convertible into 3.5 shares of common stock. The current dividends have been paid. To date, no preferred stock has been converted. 2. Convertible bonds: Bonds with a face value of $100,000 and an interest rate of 10% were issued at par on July 1, 2016. Each $1,000 bond is convertible into 35 shares of common stock. To date, no bonds have been converted, Percy earned net income of $54,000 during 2016. Its income tax rate is 30%. Required: (a) Compute the 2016 diluted earnings per share. Round your answer to two decimal places. per share (b) What basic earnings per share amount would Percy report on its 2016 income statement? Round your answer to two decimal places. per share

Answer 1

ANSWER
Earnings (Adjustments) Shares (Adjustments) = 15,000 = Earnings Per Share $ $45,000 / 3.00 Basic 3,500 Ques 1 - Explanation - Basic earnings and shares Bond interest expense savings (1/2 year) Increment in common shares - (1/2 year) : Tentative diluted EPS - Preferred dividend savings 0 Increment in common shares 1 Diluted earnings and shares DEPS 1 1,750 16,750 = $ 2.90 $48,500 / 9,000 $57,500 / 3,500 20,250 = $ 2.84 Diluted final answer 3 Workings: 4 a)$45,000 = $54,000 net income - $9,000 preferred dividends s b)15,000 = 15,000 * 12/12 6 c)Impact of diluted earnings and ranking Ranking 8 Preferred (9000/(1000*3.5)) $ 2.57 Bonds (10000*(1-0.30)*6/12 months )/(100*3.5*6/12 months) $ 2.00 2 d)Convertible bonds are included in diluted earnings per share because $2.00 < $3.00, so individually 3 dilutive. 5 e)Convertible preferred stock is included in diluted earnings per share because $2.57 < $2.90, so individually 6 dilutive

Ques 2 Percy would report basic earnings per share of $3.00 and diluted earnings per share of $2.84 on its 2016 income statement

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