During 2018, M Co. had the following two classes of stock issued and outstanding for the entire year: • 400,000 shares of common stock, $1 par.
• 2,000 shares of 4% preferred stock, $100 par, convertible share-for-share into common stock.
M's 2018 net income was $1,800,000, and its income tax rate for the year was 30%. In the computation of diluted earnings per share for 2018, the amount to be used in the numerator is:
A) $1,792,000.
B) $1,796,000.
C) $1,800,000.
D) $1,802,400.

Question

Quizplus · Accepted Answer

The "if converted method" assumes that the preferred stock was converted to common stock and that preferred dividends were not distributed. Therefore, the numerator in the computation of Diluted EPS would be the net income of $1,800,000.