17-3

Question 1

On June 30, 2014, 4% convertible
bonds were converted into 100,000 additional shares.

Answer 1

ALWAYS LOOK AT THE DATE:

100,000 x 6/12 = 50,000

To calculate the dilutive factor for these bonds you need to assume that they were converted at January 1st. That only means you would add another 50,000 shares as they would be outstanding for the whole year in this case:

100,000 x 12/12 = 100,000

AND add back the interest expense (after tax) that you’d have saved

Question 2

Call options

Answer 2

When you need to calculate EPS = Ch 17, don’t think of Ch.16 where you have to record the journal entry. Just calculate the effect on dilution:

1. Determine PROCEEDS and the # of shares issued
2. See how many shares you can buy back (treasury shares purchasable) with the PROCEEDS you got
3. The difference goes into denominatior - calculate that EPS

Question 3

June 30: 10,000 call options giving holders the right to purchase shares of the company for $30

Answer 3

When you calculate how many incremental shares ( = proceeds - treasury shares purchasable) PRORATE for how many months they would be outstanding

Question 4

Sept. 30: 15,000 put options allowing holders to sell shares of the company for $25

Answer 4

The put options are not in the money since the company would be able to buy the shares at $25, which is lower than the market price of $35. The put options are not included in the calculation of diluted earnings per share