Can Company is a calendar year entity with a complex capital structure.

Can reported
a loss on discontinued operations (net of tax) of $1,200,000 in the first quarter when
ít income before the loss was $1,000,000
The average market price of Carolina’s common stock for the first quarter was $25,
the shares outstanding at the beginning of the period equaled 300,000 and 12,000
shares were issued on March 1.
At the begining of the quarter, Can had outstanding $2,000,000 of 5% convertible
bonds, with each $1,000 bond convertible into 10 shares of common stock. No bonds
were converted.
At the begining of the quater, Can also had out standing 120,000 shares of preferred
stock paying a dividend of $0,1 per share at the end of each quarter and convertible to
common stock on a one-to-one basis. Holder of 60,000 shares of preferred stock
exercised their conversion privillege on February 1.
Throughout the first quater, warants to buy 50,000 shares of Can’s common stock for
$28 per share were outstanding but unexercised. Can’s tax rate was 30%.
Require:
1. Compute basic earnings per share for net income or loss.
2. Compute the weight-average number of shares used to calculate dilutive earning
per share amounts for the first quarter.
3. Compute dilutive earning per share for net income or loss.
4. Compute the effect of assumed conversions on the numerator of the dilutive
earning per share fraction.
Answer
1. The weighted – average of shares used in the BEPS denominator is
300,000+12,000 *1/3 + 60,000*2/3 = 344,000.
The numerator equals inceme before loss on discountinued operation minus preferred
dividends of (120,000 preferred shares -60,000 preferred shares converted)X $0.1 =$
6,000
The numerator equals = $1,000,000 -$6,000 -1,200,000 = $(206,000)
BEPS = $(206,000)/344,000 = $(0.6)
2. The incremental shares from assumed conversion of warrants is zezo because they
are diluative. The $25 market price is less than the $28 exercise price.
The assumed conversion of all the preferred shares at the begining of the quater
results in 80,000 incremental shares. ( 120,000X1/3 + 60,000 X2/3)
The assumed conversion of all the bonds at the begining of the quater results in
20,000 incremental shares = $2,000,000:$1,000 per bond *10 common shares per
bond.
The weight-average number of shares used to calculate dilutive earning per share
amounts for the first quarter = 344,000 + 0 +80,000 +20,000 = 444,000
3. The numerator equals the income available to common shareholders, plus the
effect of the assumed conversions, minus the loss on discountinued operations. The
denominator equals the weighted-average of shares outstanding plus the dilutive
potential common shares.
The control number for determining whether potential common shares are dilutive of
antidilutive is $1,000,000 income before loss – (120,000 preferred shares – 60,0000
preferred shares converted) X 0,1 = $994,000
So the dilutive earnings per share is ($994,000+$23,500-$1,200,000)/444,000 =
$(0,41).
4. If all of the convertible preferred shares are assumed to be converted on January,
$6,000 of dividends will not paid.
If the bonds are assumed to be converted on January 1, interest (2,000,000X 5%/4) X
(1-0.3) = $17,500 will not paid.
The effect of assumed conversions on the numerator of the dilutive earning per share
fraction = 6,000 + 17,500 = $23,500.