[Anonymous]

I’m taking my FAR test this Sat and am reviewing the questions 2nd round. I’m confused on diluted EPS because it seems to me Roger, Becker and Wiley CPA review have 3 different answers. My question is, do you weight the number of shares that those bonds convertible converted to common stocks in the denominator of diluted EPS calc?

For example, if October 1, 2007, company issued 5,000, $1,000 face value, 7% convertible bonds. Each bond is convertible into 40 shares. Do you include $50,000 shares in the denominator or 200,000 shares?

Lastly, will it be different if the question says the bonds were issued in the beginning of the year?

PLEASE help me. greatly appreciated it.

[italianCPA]

You don't have to weigh. You use the “if-converted” method and assume they're converted at the beginning of the period.

FAR - 7/26/10 - 95
AUD - 8/10/10 - 88
BEC - 8/31/10 - 88
REG - 10/15/10 - 95

[Anonymous]

To the denominator you add the shares issuable upon conversion, so in this case you would add 5000 x 40 = 200,000 shares (5000 bonds and each convertible into 40 shares). To the numerator you would add after tax interest.

As italianCpa says you assume that they are converted at the beginning of the period. Interestingly, even if the bonds actually had been converted at some point in the year, the EPS stays precisely the same.

[Author]

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