[Anonymous]

The following information is relevant to the computation of Chan Co.’s earnings per share to be disclosed

on Chan’s income statement for the year ending December 31:

Net income for 2002 is $600,000.

$5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were

issued four years ago at a discount which is being amortized in the amount of $20,000 per year.

The stated rate of interest on the bonds is 9%, and the bonds were issued to yield10%. Each

$1,000 bond is convertible into 20 shares of Chan’s common stock.

Chan’s corporate income tax rate is 25%.

Chan has no preferred stock outstanding, and no other convertible securities. What amount should be

used as the numerator in the fraction used to compute Chan’s diluted earnings per share assuming that

the bonds are dilutive securities?

a. $130,000

b. $247,500

c. $952,500

d. $1,070,000

Choice “c” is correct.

Why?

The numerator is net income + interest on bonds less tax effects.

600,000 + 352,500 = 952,500.

Where do they get $352,500?

[Anonymous]

CPAWannaBe-

This is how you get to the 352,000.

Since you have the bond amortization of 20,000 that essentially adds to the interest paid out in cash to the bond holder by 20,000 (though the bond holder does not get it then). So to the stated cash interest of 450,000 you add this amount of 20,000 to get the total interest the compnay would save— 450,000 + 20,000= 470,000. Subtract the tax on 470,000 and you get to the 352,500.

Hope this helps and good luck with your exam!

Anagha.

[Anonymous]

Thank you! Good luck to you too!!

[Author]

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