Question 3- 8 marks

Russell Ltd. net income for the year ended December 31, 2021 was $140,000. Russell had 60,000 common shares outstanding at the beginning of the year. Russell wanted to consolidate the number of shares outstanding and so declared a one for two stock split effective June 1, 2021. The company then repurchased 10,000 common shares on October 1, 2021 and cancelled them. Details of Russells liabilities and equities follows:

• Bonds A $2,000,000, 3%, five year semi annual bonds issued at face value on October 1, 2021. At the option of the holder each $1,000 bond can be converted into eight common shares at any time prior to expiry.
• Bonds B $1,000,000, 4%, semi annual bonds maturing September 30, 2036, issued at face value. At the option of the holder, each $1,000 bond can be converted into six and a half common shares at any time prior to expiry.
• 10,000, $100 non cumulative preferred shares that are each entitled to dividends of $1.00 per annum. Dividends were not declared in 2021.
• Russells corporate tax rate was 20%. The recorded conversion factor for the convertible bonds has already been adjusted for the stock split.

Required:

Assuming that the effective rate of interest on the bonds equals the coupon rate:

1. Compute Russells basic earnings per share for 2021;
2. Prepare a schedule that sets out the income effect, share effect, and incremental EPS for each security that is convertible into common shares. Rank them in order of dilutiveness.
3. Compute Russells diluted earnings per share for 2021.