[Anonymous]

I understand how you get the answer, but am just wondering, if the bonds are discounted at 20,000 per year, why add back the 20,000 per year in this calculation? Wouldn’t NOT subtracting 20,000 be sufficient, and thus adding 20,000 back would be double-counting the amount not amortized it this year?

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The following information is relevant to the computation of Chan Co.’s earnings per share to be disclosed on Chan’s income statement for the year ending December 31:

Net income for the year is $600,000.

$5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four years ago at a discount that is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is convertible into 20 shares of Chan’s common stock.

Chan’s corporate income tax rate is 25%.

Chan has no preferred stock outstanding and no other convertible securities. What amount should be used as the numerator in the fraction used to compute Chan’s diluted earnings per share assuming that the bonds are dilutive securities?

A. $130,000

B. $247,500

Correct C. $952,500

D. $1,070,000

The numerator will be Net income + Interest (net of tax).

Net income $600,000

Interest:

Cash ($5,000,000 x .09) $450,000

Discount amortization 20,000

Tax ($470,000 x .25) (117,500) 352,500

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Numerator $952,500

[Anonymous]

The bond is issued at a discount, which means that the check amount every year is 470,000.

Interest expense = annual payment + amortization

Interest expense = 450,000 + 20,000

Interest expense = 470,000

The discount amortization is a part of the interest expense.

[Author]

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