Question

On June 30, 20X8, Lomond, Inc. issued twenty $10,000, 7% bonds at par. Each bond was convertible into 200 shares of common stock. On January 1, 20X9, 10,000 shares of common stock were outstanding. The bondholders converted all the bonds on July 1, 20X9. The following amounts were reported in Lomond's income statement for the year ended December 31, 20X9:

Revenues $977,000
Operating expenses $920,000
Interest on bonds $7,000
Income before income tax $50,000
Income tax at 30% $15,000
Net income $35,000

What is Lomond's 20X9 diluted earnings per share?
a. $2.50
b. $2.85
c. $2.92
d. $3.50

Answer 1

c.$ 2.92 per share

Step-by-step explanation:

The earnings per share is calculated by dividing the net income by the weighted average number of shares outstanding. The bond holders converted their bonds into shares on July 01, 20x9 so their shares were only outstanding for 6 months.

The weighted average number of shares is determined as follows:

January - June 10,000 shares

July December 10,000 + (20 *200= 4,000 shares) 14,000 shares

The weighted average no of shares outstanding is 12,000 shares

The net income $ 35,000

Earnings per share $ 2.92 per share