On January 2, 2009, L Co. issued at par $20,000 of 4% bonds convertible in total into 1,000 shares of L's common stock. No bonds were converted during 2009. Throughout 2009, L had 1,000 shares of common stock outstanding. L's 2009 net income was $2,000. L's income tax rate is 50%. No potential common shares other than the convertible bonds were outstanding during 2009. L's diluted earnings per share for 2009 would be : A. $1.00. B.$1.20. C. $1.40. D. $2.00.

Question

Business

Buchanan

18 November, 17:08

On January 2, 2009, L Co. issued at par $20,000 of 4% bonds convertible in total into 1,000 shares of L's common stock. No bonds were converted during 2009. Throughout 2009, L had 1,000 shares of common stock outstanding. L's 2009 net income was $2,000. L's income tax rate is 50%. No potential common shares other than the convertible bonds were outstanding during 2009. L's diluted earnings per share for 2009 would be : A. $1.00. B.$1.20. C. $1.40. D. $2.00.

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Answers (1)

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Osvaldo Floyd · Answer 1

The correct answer is $1.2 per share.

Explanation:

According to the scenario, the computation of the given data are as follows:

Interest expense of Bonds = $20,000 * 4% = $800

Now, Interest expense of Bond, After tax = $800 * (1 - 50%) = $800 * 0.50

= $400

So, we can calculate the diluted earning by using following formula:

Diluted Earning = (Net income + Interest expense after tax) : Total outstanding shares outstanding

Where, Total outstanding shares = 1,000 shares + 1,000 shares = 2,000 shares

By putting the value, we get

Diluted earning = ($2000 + $400) : 2,000

= $1.2 per share