[shawnl112]

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 4 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 yield 10%. Each $1,000 bond is convertible into 20 shares of Chan’s common stock.

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. $1,070,000
C. $952,500
D. $247,000

The answer is c. 952,500.

450,000 (5,000,000 face * 9% stated rate) plus the discount amortization of 20,000

600,000 + [(470,000 * (1-25%)] = $600,000 + 352,500 = 952,500

My question is why is 20,000 added to the bond interest? Bond premium would be subtracted?

[Anonymous]

It’s a discount (NOT Premium) amortization.

[shawnl112]

I know it is not a premium. I am saying I guess we are adding the 20,000 because it is an expense.

but what would happen IF we had a bond premium….?

[Anonymous]

Sorry, I didn't get the call of the question.

Interest Expense = Face Amount x (Nominal Rate / Coupon Rate / Stated Rate / Contractual Rate) + Discount Amortization

Interest Expense = Face Amount x (Nominal Rate / Coupon Rate / Stated Rate / Contractual Rate) – Premium Amortization

[Author]

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