Jackie Enterprises Ltd. has a tax rate of 30% and reported net income of $8.5 million in 2014. The following details are from Jackie's statement of financial position as at December 31, 2014, the end of its fiscal year:
Long-Term Debt:
Bonds payable due Dec. 31, 2020, 10% (issued at par) ............................................. $ 5,000,000
Bonds payable, face value $9,000,000, due Dec. 31, 2024, 7.25%, convertible
into common shares at the investor's option at the rate of two shares per $100 of bonds ........ 8,600,000
Shareholders' Equity:
Preferred shares, $4.50 cumulative, convertible into common shares at the rate of
two common shares for each preferred share, 120,000 shares outstanding ....................... $ 5,500,000
Preferred shares, $3.00 cumulative, convertible into common shares at the rate of
one common share for each preferred share, 400,000 shares outstanding ......................... 10,000,000
Common shares, 1,700,000 shares outstanding
Contributed surplus-conversion rights for bonds ....................................................... 750,000
Retained earnings ........................................................................................... 9,500,000
Other information:
1. Quarterly dividends were declared on March 1, June 1, September 1, and December 1 for the preferred shares and paid 10 days after the date of declaration.
2. Dividends paid on common shares amounted to $980,000 during the year and were paid on December 20, 2014.
3. Interest expense on bonds payable totalled $1,178,200, including bond discount amortization, which is recorded using the effective interest amortization method.
4. There were no issuances of common shares during the 2014 fiscal year, and no conversions.
Instructions
(a) Determine the amount of interest expense incurred in 2014 for each of the bonds outstanding at December 31, 2014.
(b) Calculate basic earnings per share for 2014.
(c) Determine the potential for dilution for each security that is convertible into common shares.
(d) Calculate diluted earnings per share for 2014.
(e) What is the significance of the preferred share dividends being paid quarterly? What impact, if any, does this frequency in payment have on the calculation of diluted earnings per share?