On January 1, 2017, Buffalo Company issued 10-year, $2,020,000 face value, 6% bo

Question

On January 1, 2017, Buffalo Company issued 10-year, $2,020,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 14 shares of Buffalo common stock. Buffalo’s net income in 2017 was $326,000, and its tax rate was 40%. The company had 101,000 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 $1,010,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Buffalo common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Explanation / Answer

Calculate diluted earning per share :

a) Adjusted net income = 326000+(2020000*6%*60%) = 398720

Adjusted diluted shares = 101000+(2020000*14/1000) = 129280

Diluted earning per share = 398720/129280 = 3.08 per share

Calculate diluted earning per share :

b) Adjusted net income = 326000

Adjusted diluted shares = 101000+(1010000*5/100) = 151500

Diluted earning per share = 326000/151500= 2.15 per share

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