On January 1, 2017, Kingbird Company issued 10-year, $1,880,000 face value, 6% b

Question

On January 1, 2017, Kingbird Company issued 10-year, $1,880,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 14 shares of Kingbird common stock. Kingbird’s net income in 2017 was $294,000, and its tax rate was 40%. The company had 110,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

(a) Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. $2.55.)

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that $1,100,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Kingbird common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Explanation / Answer

a) Diluted earning per share :

Adjusted net income = (1880000*6%*60%)+294000 = 361680

Adjusted shares = (1880000*14/1000+110000) = 136320

Diluted earning per share = 361680/136320 = 2.65 per share

b) Diluted earning per share :

Adjusted net income = 294000 = 294000

Adjusted shares = (1100000*5/100+110000) = 165000

Diluted earning per share = 294000/165000 = 1.78 per share

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