Question

In determining earnings per share, interest expense, net of applicable income taxes, on convertible debt which is dilutive should be:

A. Added back to net income for basic earnings per share, and ignored for diluted earnings per share
B. Deducted from net income for both basic earnings per share and diluted earnings per share
C. Added back to net income for diluted earnings per share
D. Deducted from net income for basic earnings per share and ignored for diluted earnings per share.

Answer 1

C. Added back to net income for diluted earnings per share

Step-by-step explanation:

Diluted earnings per share is used to measure the quality of a business's earnings per share if all convertible securities are excercises.

It is usually lower than EPS. Convertible securities include outstanding convertible preference shares, convertible debentures, stock options and warrants.

Dilutive securities are not considered to be common stock but can be converted to common stock.

When determining EPS all interest expense from dilutive securities are usually deducted from EPS income and added to back to net income for diluted EPS

Answer 2

C. Added back to net income for diluted earnings per share

Step-by-step explanation:

Diluted Earning per Share = Adjusted Earnings Attributable to Holders of Common Stock / Adjusted Weighted Average Number of Common Stockholders

The Interest expense on convertible debt which is dilutive should be:

1. Deducted from net income for basic earnings per share.
2. Added back to net income for diluted earnings per share