Good Luck everyone!!! @D C I too have a night of drinking planned in the near future lol
I'm tackling Dilutive EPS and this problem has me confuzzled, maybe someone can take a stab. My question is, why did they not use the effective rate to calculate the interest expense?
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 year 5 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 yield 10%. 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?
$ 952,500
This answer is correct. The requirement is to identify the amount that should be used as the numerator in the fraction used to compute diluted earnings per share. Because the bonds are convertible, the diluted earnings per share calculation requires interest expense (net of the tax effect) to be added back to net income. Interest expense on the bond is equal to $470,000 [($5,000,000 × 9%) + $20,000]. The tax effect is $117,500 ($470,000 × 25%). Therefore, the numerator is equal to $952,500 ($600,000 + $470,000 – $117,500).
FAR - 89 (8/19/14) Wiley TB, Wiley Book, Books from School, Ninja Audio/Notes
AUD - 92 (10/14/14) Wiley TB, Wiley Book, Ninja Audio
BEC - 82 (5/8/15) Mostly Ninja MCQ, sprinkles of Becker lectures and Ninja Audio
REG - (8/14/15)
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