This simple accounting problem is eluding me!

[Dacalo]

I am trying to solve a problem in the book to get a better understanding of the subject, but I keep getting this one wrong.


Problem:

On January 2, 2004, Joy Co. issued at par $450,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2004. Joy had 50,000 shares of common stock oustanding during 2004. Joy's 2004 net income was $240,000 and the income tax rate was 30%. What would be Joy's diluted earnings per share?

My solution:

Net income $240,000
Add: adjustment for interest (net of tax)
($450,000 X 9%)X(1-0.3) $28,350
Adjusted net income $268,350

Weighted average number of shares outstanding 50,000
Add: Shares assumed to be issued:
9% debentures (as of beginning of year) 13,500*
Adjusted number of shares for dilutive securities 63,500

*$450,000/$1,000 = 450 bonds
450 * 30 shares = 13,500

So $268,350/63,500 = $4.23 Diluted EPS

But this is incorrect, and I don't know the answer.
Any help would be appreciated!

 

[CPA]

Don't ask me, your solution looks right.

You have to add the net of tax interest to the denominator and the shares of the conversion to the numerator. Not sure what's missing.

 

[JS80]

Originally posted by: Dacalo
I am trying to solve a problem in the book to get a better understanding of the subject, but I keep getting this one wrong.


Problem:

On January 2, 2004, Joy Co. issued at par $450,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2004. Joy had 50,000 shares of common stock oustanding during 2004. Joy's 2004 net income was $240,000 and the income tax rate was 30%. What would be Joy's diluted earnings per share?

My solution:

Net income $240,000
Add: adjustment for interest (net of tax)
($450,000 X 9%)X(1-0.3) $28,350
Adjusted net income $268,350

Weighted average number of shares outstanding 50,000
Add: Shares assumed to be issued:
9% debentures (as of beginning of year) 13,500*
Adjusted number of shares for dilutive securities 63,500

*$450,000/$1,000 = 450 bonds
450 * 30 shares = 13,500

So $268,350/63,500 = $4.23 Diluted EPS

But this is incorrect, and I don't know the answer.
Any help would be appreciated!

Why are you adding the bond interest expense?

it's NI minus taxes divided by diluted shares = diluted eps

 

[Playmaker]

Originally posted by: JS80

Originally posted by: Dacalo
I am trying to solve a problem in the book to get a better understanding of the subject, but I keep getting this one wrong.


Problem:

On January 2, 2004, Joy Co. issued at par $450,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2004. Joy had 50,000 shares of common stock oustanding during 2004. Joy's 2004 net income was $240,000 and the income tax rate was 30%. What would be Joy's diluted earnings per share?

My solution:

Net income $240,000
Add: adjustment for interest (net of tax)
($450,000 X 9%)X(1-0.3) $28,350
Adjusted net income $268,350

Weighted average number of shares outstanding 50,000
Add: Shares assumed to be issued:
9% debentures (as of beginning of year) 13,500*
Adjusted number of shares for dilutive securities 63,500

*$450,000/$1,000 = 450 bonds
450 * 30 shares = 13,500

So $268,350/63,500 = $4.23 Diluted EPS

But this is incorrect, and I don't know the answer.
Any help would be appreciated!

Why are you adding the bond interest expense?

it's NI minus taxes divided by diluted shares = diluted eps

Don't you add back the interest, less tax effects? He's doing that correctly.

It's been awhile since I've learned it, but that's how I would do it. I don't know what's wrong with your answer.

What level accounting class?

 

[CPA]

Originally posted by: JS80

Originally posted by: Dacalo
I am trying to solve a problem in the book to get a better understanding of the subject, but I keep getting this one wrong.


Problem:

On January 2, 2004, Joy Co. issued at par $450,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2004. Joy had 50,000 shares of common stock oustanding during 2004. Joy's 2004 net income was $240,000 and the income tax rate was 30%. What would be Joy's diluted earnings per share?

My solution:

Net income $240,000
Add: adjustment for interest (net of tax)
($450,000 X 9%)X(1-0.3) $28,350
Adjusted net income $268,350

Weighted average number of shares outstanding 50,000
Add: Shares assumed to be issued:
9% debentures (as of beginning of year) 13,500*
Adjusted number of shares for dilutive securities 63,500

*$450,000/$1,000 = 450 bonds
450 * 30 shares = 13,500

So $268,350/63,500 = $4.23 Diluted EPS

But this is incorrect, and I don't know the answer.
Any help would be appreciated!

Why are you adding the bond interest expense?

it's NI minus taxes divided by diluted shares = diluted eps

No, it's NI + Int - Tax on Int divided by diluted shares. You are adding the effect of the interest savings because the assumption is you won't be paying interest on the bonds since they are converted.

 

[JS80]

Originally posted by: CPA

Originally posted by: JS80

Originally posted by: Dacalo
I am trying to solve a problem in the book to get a better understanding of the subject, but I keep getting this one wrong.


Problem:

On January 2, 2004, Joy Co. issued at par $450,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2004. Joy had 50,000 shares of common stock oustanding during 2004. Joy's 2004 net income was $240,000 and the income tax rate was 30%. What would be Joy's diluted earnings per share?

My solution:

Net income $240,000
Add: adjustment for interest (net of tax)
($450,000 X 9%)X(1-0.3) $28,350
Adjusted net income $268,350

Weighted average number of shares outstanding 50,000
Add: Shares assumed to be issued:
9% debentures (as of beginning of year) 13,500*
Adjusted number of shares for dilutive securities 63,500

*$450,000/$1,000 = 450 bonds
450 * 30 shares = 13,500

So $268,350/63,500 = $4.23 Diluted EPS

But this is incorrect, and I don't know the answer.
Any help would be appreciated!

Why are you adding the bond interest expense?

it's NI minus taxes divided by diluted shares = diluted eps

No, it's NI + Int - Tax on Int divided by diluted shares. You are adding the effect of the interest savings because the assumption is you won't be paying interest on the bonds since they are converted.

But they already paid the interest throughout the year. So at the end of the year fully diluted would be if the bonds converted. If the bonds converted, the interest was still already paid, hence you don't add back interest.

 

[Dacalo]

Originally posted by: JS80

Originally posted by: CPA

Originally posted by: JS80

Originally posted by: Dacalo
I am trying to solve a problem in the book to get a better understanding of the subject, but I keep getting this one wrong.


Problem:

On January 2, 2004, Joy Co. issued at par $450,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2004. Joy had 50,000 shares of common stock oustanding during 2004. Joy's 2004 net income was $240,000 and the income tax rate was 30%. What would be Joy's diluted earnings per share?

My solution:

Net income $240,000
Add: adjustment for interest (net of tax)
($450,000 X 9%)X(1-0.3) $28,350
Adjusted net income $268,350

Weighted average number of shares outstanding 50,000
Add: Shares assumed to be issued:
9% debentures (as of beginning of year) 13,500*
Adjusted number of shares for dilutive securities 63,500

*$450,000/$1,000 = 450 bonds
450 * 30 shares = 13,500

So $268,350/63,500 = $4.23 Diluted EPS

But this is incorrect, and I don't know the answer.
Any help would be appreciated!

Why are you adding the bond interest expense?

it's NI minus taxes divided by diluted shares = diluted eps

No, it's NI + Int - Tax on Int divided by diluted shares. You are adding the effect of the interest savings because the assumption is you won't be paying interest on the bonds since they are converted.

But they already paid the interest throughout the year. So at the end of the year fully diluted would be if the bonds converted. If the bonds converted, the interest was still already paid, hence you don't add back interest.

CPA is correct (well he is a CPA afterall). If-converted method assumes conversion as of the beginning of the year, thus no interest on the convertibles is assumed to be paid during the year. This problem is making me go #@#!$$@!.

 

[Dacalo]

Originally posted by: Playmaker

Don't you add back the interest, less tax effects? He's doing that correctly.

It's been awhile since I've learned it, but that's how I would do it. I don't know what's wrong with your answer.

What level accounting class?

This is intermediate accounting.

 

[Playmaker]

Originally posted by: Dacalo

Originally posted by: Playmaker

Don't you add back the interest, less tax effects? He's doing that correctly.

It's been awhile since I've learned it, but that's how I would do it. I don't know what's wrong with your answer.

What level accounting class?

This is intermediate accounting.

What book? Do you know the answer, but not the worked out solution?