59) During 2018, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2018.

On January 1, 2017, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares.

Angel's net income for the year ended December 31, 2018, was $6 million. The income tax rate is 20%.

What will Angel report as diluted earnings per share for 2018, rounded to the nearest cent?

A) $6.43.

B) $6.25.

C) $6.22.

D) None of these answer choices are correct.

Answer: D

Explanation:

Net income		Preferred dividends		After-tax interest savings
$6,000,000	-	150,000 + 80,000*	=	$5,930,000	= $6.52/share**
900,000		+ (2,000 5)		910,000 shares
Shares at Jan. 1		conversion of bonds

*(2,000,000 5%) = $100,000 in interest; $100,000 20% = $20,000 in tax savings

So, after-tax interest cost = $80,000.

**Because this increases EPS, it is antidilutive. Only $6.50 basic EPS will be reported.

QUESTION:

IN THIS SOLUTION HOW IS THE (2,000 x 5) DETERMINED TO GET TO THE SOLUTION?