Question

On January 2, 2021, Sunland Company issued at par $9900 of 5% bonds convertible in total into 1000 shares of Sunland's common stock. No bonds were converted during 2021. Throughout 2021, Sunland had 1000 shares of common stock outstanding. Sunland's 2021 net income was $4500, and its income tax rate is 25%. No potentially dilutive securities other than the convertible bonds were outstanding during 2021.

Sunland's diluted earnings per share for 2021 would be (rounded to the nearest penny) _____.

Answer 1

$2.44 per share

Step-by-step explanation:

The computation of diluted earnings per share is shown below:-

Savings in interest if bonds are converted net of tax

= (9900 × 0.05) × (1 - 0.25)

$495 × 0.75

= $371.25

If bonds are converted the total earnings = $4,500 + $371.25

= $4,871.25

Total shares outstanding = 1,000 + 1,000

= 2,000

Diluted Earning per share = Total earning ÷ Total shares outstanding

= $4871.25 ÷ 2,000

= $2.44 per share

So, for computing the diluted earning per share we simply divide total earnings by total shares outstanding.