Gilley co. had 200,000 shares of common stock, 20,000 shares of preferred stock,

Question

Gilley co. had 200,000 shares of common stock, 20,000 shares of preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2017. During 2017, Gilley paid dividends of $.90 per share on the common stock and $4.90 per share on the preferred stock. Each $1,000 bond is convertible into 60 shares of common stock. The net income for 2017 was $600,000 and the income tax rate was 30%.. Basic earnings per share for 2017 is (rounded to the nearest cent): Diluted earnings per share for 2017 is (rounded to the nearest cent):

Explanation / Answer

Calculation of Basic Earning per share =

Earning Available to equity Shares / Weighted Average Number of Equity shares

Calculation of Earnings available to equity Shares :

Net income                                                                      $600000

Less:Dividend paid to Preference shareholders               98000

Earnings available to equity Shares                                $502000

As per above formula :

EPS = $502000 / 200000 = $2.51

Calculation of Diluted Earning per share:

= (Earning Available to equity Shares + Savings of interest Due to Conversion of bond) / ( Weighted Average Number of Equity shares  + Converted Bonds)

= 502000 + 100000*(1-0.30) / 200000 + 60000

= $2.20

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