Diluted Earnings per Share—Conversion of Debentures
The following information relates to the December 31, 2007, balance sheet for Chiapucci Incorporated.
|
6% convertible 10 year debentures issued at par |
$1,000,000 |
|
Common stock, $12 par, 110,000 shares issued and outstanding |
$1,320,000 |
|
Retained earnings |
842,000 |
|
Total stockholders’ equity |
$2,162,000 |
The convertible debentures include terms stating that each $1,000 bond can be converted into 30 shares of common stock. The following events occurred during 2008.
(a) On August 31, 2008, the complete issue of convertible debentures was converted into common stock.
(b) Chiapucci reported net income of $540,000 in 2008. The company’s income tax rate was 30%.
(c) No other common stock transactions took place during the year other than the debenture conversion.
Instructions:
1. Compute basic and diluted EPS for the year ended December 31, 2008.
2. Assume that Chiapucci had a net loss of $220,000. Show why the convertible debentures are antidilutive under loss conditions.