When we assume conversion of convertible bonds, the numerator is increased by:
A) The amount of after-tax interest.
B) The gross amount of interest.
C) The weighted-average interest.
D) The amount of cash paid during the current year for interest.

Question

Quizplus · Accepted Answer

When we assume the conversion of convertible bonds for the purpose of calculating diluted earnings per share (EPS), the numerator (earnings) is increased by the amount of after-tax interest. This adjustment is made because if the bonds were converted into stock, the company would no longer need to pay interest on those bonds, thus increasing its net income available to common shareholders.

When We Assume Conversion of Convertible Bonds, the Numerator Is