Question

E16-25 (EPS with Convertible Bonds and Preferred Stock) On January 1, 2014, Crocker Company issued10-year, $2,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Crockercommon stock. Crocker�s net income in 2014 was $300,000, and its tax rate was 40%. The company had100,000 shares of common stock outstanding throughout 2014. None of the bonds were converted in 2014.Instructions(a) Compute diluted earnings per share for 2014.(b) Compute diluted earnings per share for 2014, assuming the same facts as above, except that$1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferredshare is convertible into 5 shares of Crocker common stock.

Answer 1

The answer is given below;

Step-by-step explanation:

EPS=Net income-preferred dividends/Weighted average shares outstanding

a.Net income=$300,000*(1-30%)=$210,000

Common stocks 100,000

Bonds assumed to be converted into common stocks =$2,000,000/$1,000=2,000*15=30,000

Total common stocks=100,000+30,000=130,000

Diluted EPS=$210,000/130,000=$1.615

b.

*Net income=210,000-(1,000,000*6%)=$150,000

Common stocks=100,000

Bonds =$1,000,000/$1,000=1,000*15=15,000

Preferred stocks=$1,000,000/$100=10,000*5=50,000

Total weighted average shares=100,000+15,000+50,000=165,000

Diluted EPS=Net income-preferred dividends/Weighted average shares

EPS=*$150,000/165,000=$.909