On January 1, 2018, Ramos Co. had $10,000 of 6% convertible bonds, convertible into 1,000 shares of Ramos's common stock. No bonds were converted during 2018. Throughout 2018, Ramos had 1,000 shares of common stock outstanding. Ramos's 2018 net income was $3,000, and its income tax rate is 30%.
Ramos's diluted earnings per share for 2018 would be:

A) $1.50 B) $1.71 C) $180 D) $3.42

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aquialaska aquialaska · Answer 1 · 2020-02-25T09:05:57+01:00

Answer:

The correct answer is option (B).

Explanation:

According to the scenario, the given data are as follows:

Convertible debt on 6% = $10,000

Net income = $3,000

Income tax rate = 30%

Common stock outstanding = 1,000 shares

Dilutive potential common stock = 1,000 Shares

So, first we calculate after tax interest on convertible debt:

= ($10,000 × 6% ) - 30% of ($10,000 × 6% )

= $600 - 180

= $420

So, we can calculate Ramos's diluted earnings per share by using following formula:

Diluted earning per share = (Net income + after tax interest) ÷ ( Common stock outstanding + Dilutive potential common stock )

= ( $3,000 + $420) ÷ ( $1,000 + $1,000)

= $3,420 ÷ $2,000

= $1.71

Hence, Ramos's diluted earnings per share for 2018 would be $1.71.