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
Basic EPS = (income available to common shareholders)/weighted average number of common shares outstanding
“Bondholders converted all the bonds on July 1, Year 3.”
This is the reason why we are including it in the basic EPS calculation also. Therefore, basic EPS is different from DEPS in that the denominator is only going to increase if the event actually happens. You don't account for potential.
$35,000/12,000 = $2.91
Diluted EPS = (income available to common shareholders + interest on dilutive securities)/weighted average number of common shares outstanding assuming all dilutive securities are converted to common stock
20 bonds*$10,000*0.07*6/12 = $4,900
20 bonds*200 shares =4,000*6/12 =2,000 shares
$4,900/$2,000 = $2.45 is less than BEPS so the convertible bonds are dilutive, if it was larger, it would be antidilutive.
I hope this makes sense.
BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?
.