On June 30, 20X8, Lomond, Inc. issued twenty $10,000, 7% bonds at par. Each bond was convertible into 200 shares of common stock. On January 1, 20X9, 10,000 shares of common stock were outstanding. The bondholders converted all the bonds on July 1, 20X9. The following amounts were reported in Lomond's income statement for the year ended December 31, 20X9:

Revenues $977,000

Operating expenses $920,000

Interest on bonds $7,000

Income before income tax $50,000

Income tax at 30% $15,000

Net income $35,000

What is Lomond's 20X9 diluted earnings per share?

a. $2.50

b. $2.85

c. $2.92

d. $3.50

Question

Business

Dominic Nicholson

8 February, 22:41

On June 30, 20X8, Lomond, Inc. issued twenty $10,000, 7% bonds at par. Each bond was convertible into 200 shares of common stock. On January 1, 20X9, 10,000 shares of common stock were outstanding. The bondholders converted all the bonds on July 1, 20X9. The following amounts were reported in Lomond's income statement for the year ended December 31, 20X9:

Revenues $977,000

Operating expenses $920,000

Interest on bonds $7,000

Income before income tax $50,000

Income tax at 30% $15,000

Net income $35,000

What is Lomond's 20X9 diluted earnings per share?

a. $2.50

b. $2.85

c. $2.92

d. $3.50

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Answers (1)

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Ryann Patrick · Answer 1

c.$ 2.92 per share

Explanation:

The earnings per share is calculated by dividing the net income by the weighted average number of shares outstanding. The bond holders converted their bonds into shares on July 01, 20x9 so their shares were only outstanding for 6 months.

The weighted average number of shares is determined as follows:

January - June 10,000 shares

July December 10,000 + (20 * 200 = 4,000 shares) 14,000 shares

The weighted average no of shares outstanding is 12,000 shares

The net income $ 35,000

Earnings per share $ 2.92 per share