Question
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 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:
- Compute Russells basic earnings per share for 2021;
- 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.
- Compute Russells diluted earnings per share for 2021.
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:
- Compute Russells basic earnings per share for 2021;
- 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.
- Compute Russells diluted earnings per share for 2021.
please show calculations
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started