Crystal Corporation earned net income of $750,000 in 2016. It has a complex capi

Question

Crystal Corporation earned net income of $750,000 in 2016. It has a complex capital structure as follows: 10,000 shares outstanding of 10%, $100 preferred stock, and 150,000 shares issued of $5 common stock. There is also 20,000 common stock in the treasury. The preferred stock can be converted into 25,000 shares of common. In addition Crystal has Bonds Payable of $250,000 that pay interest of 8% and can be converted into 10,000 shares of common stock. The applicable federal income tax rate is 40%.

Calculate the basic earnings per share for 2016.

Calculate the diluted earnings per share for 2016.

Explanation / Answer

If you find this answer useful, please do rate it.

Thank You

Working Note = Calulation for checking dilutive and antidilutive EPS to determine order of preference Bonds Interest net of tax 12000 A No. of common stock to be converted from Bonds 10000 B EPS on Increased stock 1.2 =A/B Most dilutive Preference shares Preference dividend 100000 A No. of common stock to be converted from preferred stock 25000 B EPS on Increased stock 4 =A/B Crystal Company Computation of Basic & Diluted earning per share for the year from the table given below Numerator Denominator     = Earnings per share Basic 750000 130000     = 5.77 Diluted 762000 140000     = 5.44 Note : Treasury stock are not to be considered for calculation of EPS Net Income Outstanding common stock Earning Per share As reported 750000 130000 5.769231 basic Earning per share Add : 8% Bonds Payable 12000 10000 Total & Revised Earning per share 762000 140000 5.442857 Dilutive Add : 10% preferred stock 100000 25000 Total & Revised Earning per share 850000 155000 5.483871 Anti-dilutive (Note : One has to stop the calculation once anti-dilution starts and diluted earning per share is determined above the anti-dilutive figure) Since, 8% Bonds payable are most dilutive as per below table, it has been considered first for calculation. Interest on bonds added to net income is arrived after taking into tax effect, since the interest is an expense which qualify for tax deduction. While preferred dividend is not tax deductable, so it is taken without tax effect.

If you find this answer useful, please do rate it.

Thank You

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.