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Chapter 16: Q23E (page 880)

(EPS with Convertible Bonds) On June 1, 2015, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.On April 1, 2017, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2017.Lancaster Inc. also issued \(600,000 of 20-year, 8% convertible bonds at par on July 1, 2017. Each \)1,000 bond converts to 40shares of common at any interest date. None of the bonds have been converted to date.Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2017. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%.)

Instructions

Determine the following for 2017.

(a) The number of shares to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share.

(b) The earnings figures to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share

Short Answer

Expert verified

a.

(1) Basic earnings per share= 1,100,000

(2) Diluted earnings per share= 1,112,000

b.

(1) Basic earnings per share= $1,540,000

(2) Diluted earnings per share= $1,554,400

Step by step solution

01

a. Computation of no shares to be used for calculation:

1.

Jan 1 鈥� Apr, 800,000 shares x 3/12

200,000

Apr 1- Dec,1200,000 shares x 9/12

900,000

1,100,000

2.

Jan 1 - Apr 80,000 share x 3/12

200,000

Apr 1-Jul,1200,000 x 3/12

300,000

Jul 1-Dec,1224,000 x 6/12

612,000

1,112,000

02

 Computation of earnings figure to be used:

Income for basic earnings per share equals $1,540,000, and for diluted per share equals$1,554,400.

After tax Net Income

$1,540,000

Add: Interest savings ($600,000 x 0.08 x陆)

$24,000

Less: Lost tax benefit ($24,000 x 0.40)

($9,600)

Adjusted net income

$1,554,400

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Most popular questions from this chapter

On January 1, 2017, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share ofBarwood鈥檚 \(5 par value common stock at \)50 per share at any time during the next 5 years. The market price of the stock is \(65 per share on the date of grant. The fair value of the options at the grant date is \)150,000. The period of benefit is 2 years. Prepare Barwood鈥檚 journal entries for January 1, 2017, and December 31, 2017 and 2018.

The information below pertains to Barkley Company for 2018.

Net income for the year \(1,200,000

7% convertible bonds issued at par (\)1,000 per bond); each bond is convertible into

30 shares of common stock 2,000,000

6% convertible, cumulative preferred stock, \(100 par value; each share is convertible

into 3 shares of common stock 4,000,000

Common stock, \)10 par value 6,000,000

Tax rate for 2018 40%

Average market price of common stock \(25 per share

There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 75,000 shares of common stock at \)20 per share.

Instructions

(a) Compute basic earnings per share for 2018.

(b) Compute diluted earnings per share for 2018

What are the arguments for giving separate accounting recognition to the conversion feature of debentures?

On January 1, 2017 (the date of grant), Lutz Corporation issues 2,000 shares of restricted stock to its executives. The fair value of these shares is \(75,000, and their par value is \)10,000. The stock is forfeited if the executives do not complete 3 years of employment with the company. Prepare the journal entry (if any) on January 1, 2017, and on December 31, 2017, assuming the service period is 3 years.

GROUPWORK (Entries for Various Dilutive Securities) The stockholders鈥� equity section of Martino Inc. at the beginning of the current year appears below.

Common stock, \(10 par value, authorized 1,000,000

shares, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of par鈥攃ommon stock 600,000

Retained earnings 570,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at \(32. The rights were void after 30 days. The market price of the stock at this time was \)34 per share.

2. The company sold to the public a \(200,000, 10% bond issue at 104. The company also issued with each \)100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at \(30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at \)8.

3. All but 5,000 of the rights issued in (1) were exercised in 30 days.

4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing.

5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives.

The company, using a fair value option-pricing model, determines that each option is worth \(10. The option price is \)30.

The options were to expire at year-end and were considered compensation for the current year.

6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.

Instructions

(a) Prepare general journal entries for the current year to record the transactions listed above.

(b) Prepare the stockholders鈥� equity section of the balance sheet at the end of the current year. Assume that retained earnings

at the end of the current year is $750,000.
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