Question

Anchor, Inc. had income after taxes of $500,000 for the current year. An average of 125,000 shares of Anchor’s common stock was outstanding for the entire year, and 130,000 shares were outstanding at year-end. In addition, options were outstanding throughout the year to buy 12,000 shares of Anchor common stock at $7.50 per share. During the year, Anchor’s common stock had an average market price of $9 per share. The stock was selling for $10 per share at year-end. Anchor is subject to a 34% tax rate and amortizes its bonds using a straight-line method.
Anchor had the following convertible securities outstanding throughout the current year:
1. 6%, cumulative, convertible preferred stock. Each $10 par value share is convertible into 1.5 common shares. A total of $100,000 par value is outstanding.
2. 8%, 10-year, $1,000 par convertible bonds that were issued at 105. Total par value outstanding is $100,000. Each bond converts into 90 shares of common stock.
3. 13%, 5-year, $1,000 par convertible bonds that were issued at 97. Total par value outstanding is $30,000. Each bond converts into 30 shares of common stock.
4. 7%, 8-year, $1,000 par convertible bonds that were issued at 95. Total par value outstanding is $60,000. Each bond converts into 20 shares of common stock.
5. An 11%, 20-year, $1,000 par convertible bonds that were issued at face value. The total par value outstanding is $500,000. Each bond converts into 20 shares of common stock.
Required:
Calculate Anchor Inc.’s basic and diluted EPS for the current year.
Note: Use straight-line amortization for all the bonds. For example, if you have a 15 year, 10%, $1,000 face value bond issued at 85 and a $150 discount at issue, then $10 will be amortized each period using straight line amortization. You would have the following:
At issue:
Cash 850
Discount on B/P 150
Bonds Payable 1,000
Periodic entries:
Interest Expense 110
Discount on B/P 10
Cash 100

Answer 1

Answer:

Basic EPS 3.95

Basic EPS Dilutive 3.337

Explanation:

Calculation for the basic and diluted EPS for the current year

First step is to find the convertible securities outstanding for the current year from 1 to 5

1. Numerator effect=6,000

(6%*100,000)

Denominator effect=15,000

[(100,000/10)*1.5]

ME=6000/15,000=.402.

2. Premium=5,000

[(105%-100%)*100,000]

Yearly Amortization= 500

5,000/10 years

Yearly Payment= 8,000

(8%*100,000)

Numerator effect= 8,000-500

= 7,500 * (100%-34%)= 4,950

Denominator effect= 100,000/1,000

= 100*90 per share= 9000

ME= 4,950/9,000

ME=.553.13 percent

3. Discount=900

[(100%-97%)*30,000]

Yearly Amortization=180

(900/5years)

Yearly Payment=3,900

Numerator effect= 3,900+180

=4,080*(100%-34%)

= 2,692.8

Denominator effect= 900

ME=2693/900

ME= 2.994.7 percent

4. Discount=3,000

(60,000/20)

Yearly Amortization=375

(3,000/ 8years )

Yearly Payment= 4,200

Numerator effect= 4,200+375

Numerator effect= 4,575*(100%-34%)

= 3,019.5

Denominator effect= 1,200

ME= 3020/1200= 2.525

5. Numerator effect= 55,000*(100%-34%)

= 36,300

(11%*500,000=55,000)

Denominator effect= 10,000

ME=36300/10000= 3.63

Second step is to calculate the basic and diluted EPS

Calcualtion for BASIC EPS

Net income = 500,000- (100,000*.06=6000)

Net income= 494,000

Average Outstanding=125,000

Using this formula

Basic EPS=Net income/Average Outstanding

Let plug in the formula

Basic EPS:494,000/125,000

Basic EPS=3.95

Therefore the Basic EPS will be 3.95

Calculation for BASIC EPS DILUTIVE

Dilutive=494,000+6,000+4,950+2,693+3,020/125,000+2,000+15,000+9,000+900+1200

Basic EPS Dilutive=510,663/153,000

Basic EPS Dilutive=3.337

Therefore Basic EPS Dilutive will be 3.337