Effect of Convertible Bonds on Earnings per Share
Crystal Corporation owns 60 percent of Evans Company’s common shares. Balance sheet data for the companies on December 31, 20X2, are as follows:
| CrystalCorporation | Evans Company |
Cash | $ 85,000 | $ 30,000 |
Accounts Receivable | 80,000 | 50,000 |
Inventory | 120,000 | 100,000 |
Buildings and Equipment | 700,000 | 400,000 |
Less: Accumulated Depreciation | (240,000) | (80,000) |
Investment in Evans Company Stock | 150,000 |
|
Total Assets | $895,000 | $500,000 |
Accounts Payable | $145,000 | $ 50,000 |
Bonds Payable | 250,000 | 200,000 |
Common Stock ($10 par value) | 300,000 | 100,000 |
Retained Earnings | 200,000 | 150,000 |
Total Liabilities and Owners’ Equity | $895,000 | $500,000 |
The bonds of Crystal Corporation and Evans Company pay annual interest of 8 percent and 10 percent, respectively. Crystal’s bonds are not convertible. Evans’s bonds can be converted into 10,000 shares of its company stock any time after January 1, 20X1. An income tax rate of 40 percent is applicable to both companies. Evans reports net income of $30,000 for 20X2 and pays dividends of $15,000. Crystal reports income from its separate operations of $45,000 and pays dividends of $25,000.
Required
Compute basic and diluted earnings per share for the consolidated entity for 20X2.
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