During the current year, East Corporation had 2 million shares of common stock outstanding. Two thousand, $1,000, 8% convertible bonds were issued at face amount at the beginning of the year. East reported income before tax of $3 million and net income of $1.8 million for the year. Each bond is convertible into ten shares of common stock. What is diluted EPS?
A)$.90.
B)$.95.
C)$.89.
D)$.94.

Question

Quizplus · Accepted Answer

First, we need to calculate the potential common shares that would result from the conversion of the convertible bonds.

2,000 bonds x 10 shares per bond = 20,000 potential common shares

Next, we need to calculate the diluted EPS by assuming that the potential common shares were outstanding for the whole year:

Net Income / (Weighted Average Shares Outstanding + Potential Common Shares)

= $1.8 million / (2 million + 20,000)

= $1.8 million / 2.02 million

= $0.891

Rounding to two decimal places, the diluted EPS is $0.94 ($0.891 rounds up to $0.89). Therefore, the best choice is D, $.94.

During the Current Year, East Corporation Had 2 Million Shares