g On January 1, 2020, Marigold Company issued 10-year, $1,890,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Marigold common stock. Marigold’s net income in 2020 was $470,000, and its tax rate was 20%. The company had 94,000 shares of common stock outstanding throughout 2020. None of the bonds were converted in 2020. (a) Compute diluted earnings per share for 2020.

$3.78

Explanation:

The First step is to calculate basic earning per share then making the adjustments to the  basic earning per share to arrive to a diluted earning per share.

Basic Earning per Share = Earnings Attributable to Holders of Common Stock / Weighted Average Number of Common Stock Holders.

Earnings Attributable to Holders of Common Stock Calculation :

Net Income                                                                      $470,000

Less Bond Interest ($1,890,000×6%×80%)                    ($90,720)

Earnings Attributable to Holders of Common Stock    $379,280

Weighted Average Number of Common Stock Holders Calculation :

Outstanding Common Shares                                             94,000

Weighted Average Number of Common Stock Holders   94,000

Basic Earning per Share = $379,280 / 94,000 = $4.03

Diluted Earnings per Share = Adjusted Earnings Attributable to Holders of Common Stock / Adjusted Weighted Average Number of Common Stock Holders.

Adjusted Earnings Attributable to Holders of Common Stock Calculation :

Earnings Attributable to Holders of Common Stock                  $379,280

Add Back Bond Interest ($1,890,000×6%×80%)                          $90,720

Adjusted Earnings Attributable to Holders of Common Stock $470,000

Adjusted Weighted Average Number of Common Stock Holders.

Outstanding Common Shares                                                            94,000

Add Convertible Bonds ($1,890,000/$1,000×16)                              30,240

Adjusted Weighted Average Number of Common Stock Holders 124,240

Diluted Earnings per Share = $470,000 / 124,240 = $3.78

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