Convertible Preferred Stock, Convertible Bonds, and EPS Francis Company has 21,600 shares of common stock outstanding at the beginning of 2019. Francis issued 2,700 additional shares on May 1 and 1,800 additional shares on September 30. It also has two convertible securities outstanding at the end of 2019. These are: 1. Convertible preferred stock: 2,250 shares of 8.0 %, $50 par, preferred stock were issued on January 2, 2016, for $60 per share. Each share of preferred stock is convertible into 2 shares of common stock. Current dividends have been declared and paid. To date, no preferred stock has been converted. 2. Convertible bonds: Bonds with a face value of $225,000 and an interest rate of 5.0% were issued at par in 2018. Each $1,000 bond is convertible into 20 shares of common stock. To date, no bonds have been converted. Francis earned net income of $72,500 during 2019. The income tax rate is 30%. Required: 1. Compute the number of shares of common stock that Francis should use in calculating basic earnings per share for 2019. Weighted average shares outstanding: Feedback 23,850 shares. Check My Work Basic Earnings per Share Net Income Preferred Dividends Weighted Average Number of Common Shares Outstanding Example: Calculation of weighted average shares outstanding Months Shares Are Shares Outstanding x Fraction of Year Equivalent Outstanding Outstanding Whole Units January-February March-June July-November December 15,000 x 2/12 2,500 17,700 x 4/12 5,900 21,000 x 5/12 8,750 20,400 x 1/12 1,700 2. Calculate basic earnings per share for 2019. If required, round your answer to two decimal places. Basic earnings per share: $ 2.66 V Feedback Check My Work Basic Earnings per Share= Net Income Preferred Dividends Weighted Average Number of Common Shares Outstanding 3. Calculate diluted earnings per share for 2019 and the incremental EPS of the preferred stock and convertible bonds. If required, round your answers to two decimal places. Diluted earnings per share: $ 2.45 V Incremental earnings per share Bonds: Preferred: Feedback 0.70 X 0.45 X Check My Work You should assume that each convertible stock or bond was converted into common stock at the beginning of the earliest period reported (or on the date of issuance of the security, if later). This assumed conversion causes two changes in the earnings per share calculation, an increase in the denominator and an increase in the numerator: . The denominator increases by the number of common shares issued in the assumed conversion. If bonds are assumed to be converted into common stock, the numerator increases because the corporation would not have to pay interest expense (net of income taxes) for the converted bonds, increasing net income. If preferred stock is assumed to be converted into common stock, the numerator increases because the corporation would not have to pay preferred dividends on the converted preferred shares. The following partially completed schedule will help you to organize the information for this exercise. 4a. Assume the same facts as above except that net income included a loss from discontinued operations of $15,000 net of income taxes. Compute basic EPS. If required, round your answer to two decimal places. Basic earning per share: $ 2.66 V Feedback Check My Work Correct 4b. Show how the basic EPS you calculated should be reported to shareholders. You do not have to calculate diluted EPS. Francis Company EPS Computations EPS Based on: Income from continuing operations -15,000 X Loss from discontinued operations x 72,500 X Net income 57,500 X Feedback Check My Work Net income is the bottom line earnings amount on a corporation's income statement. If the net income includes any results from discontinued operations or extraordinary items, the corporation must report separate earnings per share amounts for both income from continuing operations and net income on its income statement. It is also required to disclose the earnings per share related to the results from discontinued operations and extraordinary items. The corporation may report these component amounts on its income statement or in the notes to its financial statements. When a corporation has deducted preferred dividends in the computation of total earnings per share, it also deducts these dividends from the income related to continuing operations to reconcile the earnings per share amounts. Each of these earnings per share component amounts is based on the same weighted average number of shares. When reported on the income statement, the components are summed to report the total earnings per share. The intent is to show the contribution of each income statement component to the total earnings per share