During 2016,M Co.had the following two classes of stock issued and outstanding for the entire year:
$\bullet$ 400,000 shares of common stock,$1 par.
$\bullet$ 2,000 shares of 4% preferred stock,$100 par,convertible share-for-share into common stock.
M's 2016 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 2016,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 amount to be used in the numerator for diluted earnings per share is the net income adjusted for any dividends or interest on convertible securities. Since the preferred stock is convertible share-for-share into common stock, it is dilutive and needs to be included in the calculation. However, the conversion did not occur in 2016, so no adjustment is needed. Therefore, the amount to be used in the numerator is the net income of $1,800,000.

During 2016,M Co ∙\bullet∙ 400,000 Shares of Common Stock,$1 Par ∙\bullet∙ 2,000 Shares of 4% Preferred Stock,$100 Par,convertible Share-For-Share into Common

During 2016,M Co $\bullet$ 400,000 Shares of Common Stock,$1 Par $\bullet$ 2,000 Shares of 4% Preferred Stock,$100 Par,convertible Share-For-Share into Common