Question

On January 2, 2021, L Co. issued at face value $21,000 of 2% bonds convertible in total into 1,200 shares of L's common stock. No bonds were converted during 2021. Throughout 2021, L had 1,200 shares of common stock outstanding. L's 2021 net income was $3,000. 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

Diluted earnings per share is $1.38

Step-by-step explanation:

The earnings per share =earnings for common stock/number of common stock

However,the diluted earnings considers a situation where the bonds as if the bonds have been converted to common stock,hence the after tax interest payment on the bonds would be saved by increasing net income attributable to common stock and the number of common stock also increase at the same time with the possible number of stocks issued in place of bonds.

diluted earnings per share=$3,000+($21,000*2%*(1-25%)/1200+1200

=$3315/2400=$ 1.38