Question

On January 1, 2020, Riverbed Company issued 10-year, $2,150,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Riverbed common stock. Riverbed’s net income in 2020 was $518,950, and its tax rate was 20%. The company had 94,000 shares of common stock outstanding throughout 2020. None of the bonds were converted in 2020.

a. Compute diluted earnings per share for 2020.
b. Compute diluted earnings per share for 2020, assuming the same facts as above, except that $940,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Marigold common stock.

Answer 1

(a) $4.85

(b) $3.68

Step-by-step explanation:

(a) Calculation of Adjusted Net Income -

Interest Savings [net of tax] = ($2,150,000 × 6%) - 20% tax

= $ 103,200

Net income = $518,950

Adjusted Net Income = Interest Savings [net of tax] + Net income

= $622,150

Calculation of Shares Outstanding adjusted for Dilutive Securities

Shares of common stock outstanding = 94,000 shares

Conversion of dilutive securities

= (16 shares ÷ $1000) × $2,150,000

= 34,400 shares

Shares Outstanding adjusted for Dilutive Securities=Shares of common stock outstanding + Conversion of dilutive securities

= 94,000 + 34,400 = 128,400 shares

Calculation of Diluted Earnings Per Share for 2020

= Adjusted Net Income ÷ Shares Outstanding adjusted for Dilutive Securities

= $622,150 ÷ 128,400 shares

= $4.85

(b) Net income = $518,950

Adjusted Net Income = Net income = $518,950

Calculation of Shares Outstanding adjusted for Dilutive Securities

Shares of common stock outstanding = 94,000 shares

Conversion of dilutive securities

= (5 shares ÷ $100) × $940,000

= 47,000 shares

Shares Outstanding adjusted for Dilutive Securities=Shares of common stock outstanding + Conversion of dilutive securities

= 94,000 + 47,000 = 141,000 shares

Calculation of Diluted Earnings Per Share for 2020

= Adjusted Net Income ÷ Shares Outstanding adjusted for Dilutive Securities

= $518,950 ÷ 141,000 shares

= $3.68