I want to know why we use the fraction 9/12 for the 10% debunture. If someone ca

Question

I want to know why we use the fraction 9/12 for the 10% debunture. If someone can clarify it for me.

Mayfield Corporation has net income of $210,000 for the year and a weighted-average number of common shares outstanding during the period of 100,000 shares. The basic earnings per share is therefore $2.10 ($210,000 4 100,000). The company has two convertible debenture bond issues outstanding. One is a 6 percent issue sold at 100 (total $1,000,000) in a prior year and convertible into 20,000 common shares. The other is a 10 percent issue sold at 100 (total $1,000,000) on April 1 of the current year and convertible into 32,000 common shares. The tax rate is 40 percent.

Net income for the year $210,000

Add: Adjustment for interest (net of tax)

6% debentures ($60,000 * [1 - .40])= 36,000

10% debentures ($100,000 * 9/12 * [1 - .40]) =45,000

Adjusted net income $291,000

I also need clarification on why we use 4/12:

In 2013, Chirac Enterprises issued, at par, 60, $1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 2014. (Assume that the tax rate is 40%.) Throughout 2014, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.

Assume same facts as those for Part (a), except the 60 bonds were issued on September 1, 2014 (rather than in 2013), and none have been converted or redeemed.

Explanation / Answer

1. The 10% convertible debenture was issued onApril 1 of the current year. So effective interest period is 9 months or 9/12 year. So the interest calculation is multiplied by 9/12 to give the correct effect of period.

2. Similarly , the 6% Bond is issued on Sep 1 of current year here and the effective period of interest calculation is months or 4/12 years . So the interest calculation is multiplied by 4/12 to give the correct period effect.

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