Final answer:
The calculation of diluted EPS for Sheridan Enterprises involves adjusting net income for bond interest and taxes, then dividing by the number of shares adjusted for potential bond-to-stock conversions. For part (a), no bonds were converted, part (b) issued bonds later in the year, and part (c) saw 20 bonds converted to stock, affecting both the net income and the share count.
Step-by-step explanation:
The calculation of diluted earnings per share (EPS) takes into account the potential conversion of convertible securities, like bonds or preferred shares, into common stock. This measure reflects what EPS would be if all potential common shares were issued. In the case specified, Sheridan Enterprises issued convertible bonds in 2024 which can significantly affect diluted EPS.For part (a), we first calculate net income by taking revenues ($18,100) minus expenses ($9,500) and subtracting the interest expense on the bonds (60 bonds × $1,000 × 8% = $4,800). Then we calculate the tax, which is 20% of the income before taxes. Subtracting the tax from the income before taxes gives us the net income. To find diluted earnings per share, divide the net income by the adjusted number of shares, which includes the original 1,800 shares plus the potential shares from bond conversion (60 bonds × 100 shares/bond).
For part (b), the same calculation would apply, except the bonds in question were issued later in the year, implying that the interest expense would be for lesser months, impacting the net income differently. For part (c), since 20 bonds were converted into 100 shares each, the net income would be higher due to a reduced interest expense, and the diluted EPS would be computed based on the increased number of common shares outstanding after the conversion, which is 1,800 + (20 × 100).