Hey guys, question regarding this DEPS question below:
On June 30, Year 2, Lomond, Inc., issued 20, $10,000, 7% bonds at par. Each bond was convertible into 200 shares of common stock. On January 1, Year 3, 10,000 shares of common stock were outstanding. The bondholders converted all the bonds on July 1, Year 3. The following amounts were reported in Lomond’s income statement for the year ended
December 31, Year 3: 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 amount should Lomond report as its Year 3 diluted earnings per share (DEPS)?
$3.00
$2.50
$3.50
$2.85
The answer is $2.85 = 35,000 + 7000 (1-30%)/14000
I dont understand how they get 14000 shares for common stock.
I calcuated
10,000 X 6/12 = 5,000
14000 x 6/12 = 7,000
= 12,000 shares after conversion of the convertible bonds.
It appears that the problem does not take the weighted avg of the conversion of common stock. If it is convertible, do you assume that it is outstanding throughout the year regardless of when the conversion takes place?
FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)
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