Question

Terrell Foods reported $ 660,000 in net income​ and its weighted - average shares outstanding for the year is 100,000 shares. In prior years it sold $ 1,000,000 of​ 8% long - term convertible bonds at par which are still outstanding at the start of the year. The bonds are convertible into 40,000 shares of common stock. The tax rate for all years is​ 40%. Bondholders convert the bonds on July 1 of the current year. If Terrell has no other potentially dilutive securities and no preferred​ stock, what are basic and diluted​ EPS?

Answer 1

Basic EPS = $6.6

Diluted EPS = $5.06

Step-by-step explanation:

The computation of basic and diluted​ EPS is shown below:-

Basic EPS = Net income ÷ Weighted average shares outstanding

= $660,000 ÷ 100,000

= $6.6

Interest on convertible bonds = 1,000,000 × 8%

= 80,000

Diluted EPS = (Net income + Interest on convertible bonds × (1 - Tax%)) ÷ (Weighted average shares outstanding + Shares from Convertible bonds)

= ($660,000 + 80,000 × 60%) ÷ (100,000 + 40,000)

= ($660,000 + 48,000) ÷ (140,000)

= $708,000 ÷ 140,000

= $5.06