Question

On January 2, 2016, Lang Co. issued at par $10,000 of 4% bonds convertible in total into 1,000 shares of Lang’s common stock. No bonds were converted during 2016.Throughout 2016, Lang had 1,000 shares of common stock outstanding. Lang’s 2016 net income was $1,000. Lang’s income tax rate is 50%.No potential common shares other than the convertible bonds were outstanding during 2016. Lang’s diluted earnings per share for 2016 would bea. $ .50b. $ .60c. $ .70d. $1.00International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS in accounting for share-based compensation.

Answer 1

b. $0.6

Step-by-step explanation:

Net income. $1,000

Add: Increase in net income if converted

[10,000 * 4% ( 1 - 50% )] $200

(a) Earnings available to equity share holders ($1,000 + $200). $1,200

(b) Number of shares outstanding

1,000 common shares + 1,000 potential shares = 2,000 shares outstanding

(a/b) Diluted earnings per share

1,200 ÷ 2,000 $0.6