Question

On January 2, 2021, L Co. issued at face value $26,500 of 3% bonds convertible in total into 2,300 shares of L's common stock. No bonds were converted during 2021. Throughout 2021, L had 2,300 shares of common stock outstanding. L's 2021 net income was $8,500. L's income tax rate is 20%. 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 for 2021 = $1.98

Step-by-step explanation:

Bond interest expense $883

(26,500 * 3%)

Bond interest expense, net of tax $618

(883*(1-30%) )

Net income for diluted earnings $9,118

($8,500 + $618 )

Actual and Potential common shares 4,600 shares

(2,300 shares + 2,300 shares)

Diluted earnings per share for 2021 = Net income for diluted earnings / Actual and Potential common shares

Diluted earnings per share for 2021 = $9,118 / 4,600

Diluted earnings per share for 2021 = $1.98