Question

On June 30, 2019, bonds were issued at par with a face value of $2,000,000 and a 7% stated interest rate. Each bond has a $1,000 face value and is convertible into 30 shares of common stock. The tax rate is 40%. What is the impact of these bonds on the numerator and the denominator in your December 31, 2019 diluted earnings per share calculation if the "if converted" method is used

Answer 1

The answer is "$84,000 in the numerator and 60,000 in the denominator".

Step-by-step explanation:

If securities are transformed into stocks. So, the common stack holder should be have a larger net revenue, calculation of net revenue

`= \$ 2,000,000 * 7 \% * (1 - 0.40) \\\\= \$ 2,000,000 * (7)/(100) * 0.6\\\\= \$ 20,000 * 7 * (6)/(10)\\\\= \$ 2,000* 7* 6\\\\= \$ 2,000 * 42\\\\= \$ 84,000\\`

In addition, the loads will also raise the total amount of shares which is calculated as follows:

`= (\$ 2,000,000)/( \$ 1,000 * 30)\\\\= \$ 60,000 \ stocks`

Formula:

`\ EPS =(\ net \ income)/( \ average \ number \ of \ stocks)`

That's why in this question numerator is = $ 84, 000 and denominator = $ 60,000