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 2002 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 which 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 yield10%. 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
c. $952,500
d. $1,070,000
Choice "c" is correct.
Why?
The numerator is net income + interest on bonds less tax effects.
600,000 + 352,500 = 952,500.
Where do they get $352,500?
FAR - 69, 64, 67 <-Becker, 80 <-Yaeger
AUD - 82 ETHICS - 100
BEC - 72 (retake May 2011)
