D is corrent. Diluted EPS includes the effect of any dilutive security. Both the convertible bonds and convertible preferred stock must be tested for dilution. To calculate the basic EPS, in the numerator, reported income of $285,000 would be reduced by the $24,000 of preferred dividends which gives $261,000 available for common stockholders. In the denominator 90,000 shares is the weighted-average of shares outstanding during the year. The conversion of the preferred stock will have an income effect of $24,000 (there is no tax effect) to the numerator and increase the denominator by 20,000 shares. DEPS is calculated as follows:
($261,000 + $24,000) / (90,000 shs + 20,000 shs) = $2.59
A is incorrect. Diluted EPS includes the effect of any dilutive security. Both the convertible bonds and convertible preferred stock must be tested for dilution. To calculate the basic EPS, in the numerator, reported income of $285,000 would be reduced by the $24,000 of preferred dividends which gives $261,000 available for common stockholders. In the denominator 90,000 shares is the weighted-average of shares outstanding during the year. The conversion of the preferred stock will have an income effect of $24,000 (there is no tax effect) to the numerator and increase the denominator by 20,000 shares. DEPS is calculated as follows:
($261,000 + $24,000) / (90,000 shs + 20,000 shs) = $2.59
B is incorrect. Diluted EPS includes the effect of any dilutive security. Both the convertible bonds and convertible preferred stock must be tested for dilution. To calculate the basic EPS, in the numerator, reported income of $285,000 would be reduced by the $24,000 of preferred dividends which gives $261,000 available for common stockholders. In the denominator 90,000 shares is the weighted-average of shares outstanding during the year. The conversion of the preferred stock will have an income effect of $24,000 (there is no tax effect) to the numerator and increase the denominator by 20,000 shares. DEPS is calculated as follows:
($261,000 + $24,000) / (90,000 shs + 20,000 shs) = $2.59
C is incorrect. Diluted EPS includes the effect of any dilutive security. Both the convertible bonds and convertible preferred stock must be tested for dilution. To calculate the basic EPS, in the numerator, reported income of $285,000 would be reduced by the $24,000 of preferred dividends which gives $261,000 available for common stockholders. In the denominator 90,000 shares is the weighted-average of shares outstanding during the year. The conversion of the preferred stock will have an income effect of $24,000 (there is no tax effect) to the numerator and increase the denominator by 20,000 shares. DEPS is calculated as follows:
($261,000 + $24,000) / (90,000 shs + 20,000 shs) = $2.59
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