Question

On January 2, 2021, L Co. issued at face value $20,000 of 4% bonds convertible in total into 1,000 shares of L's common stock. No bonds were converted during 2021. Throughout 2021, L had 1,000 shares of common stock outstanding. L's 2021 net income was $2,000. L's income tax rate is 25%. No potential common shares other than the convertible bonds were outstanding during 2021. L's diluted earnings per share for 2021 would be:

Answer 1

$1.3

Step-by-step explanation:

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

a. Statement showing adjusted net profit

Net income $2,000

Interest expenses $800

($20,000 × 4%)

Less: Tax relating to interest expense $200

($800 × 25%)

Adjusted Net profit $2,600

b. Statement showing weighted average number of common stock shares

Shares of common stock 1,000

Debentures converted into

common stock shares 1,000

Total number of weighted

shares 2,000

Therefore,

Diluted earning per share = Adjusted net profit ÷ Number of weighted average shares

= $2,600 ÷ 2,000

= $1.3

Therefore for computing the diluted earning per share we simply applied the above formula.