ACCOUNTING-Details for the Problem Karen Company had 105,000 shares

Details for the Problem

Karen
Company had 105,000 shares of common stock outstanding on January 1, 2011. On
August 30, 2011, Karen sold 50,000 shares of common stock for cash. Karen
also had 11,000 shares of convertible preferred stock outstanding throughout
2011. The preferred stock is $105 par, 5%, and is convertible into 4 shares
of common for each share of preferred. Karen also had 400, 8%, convertible
bonds outstanding throughout 2011. Each $1,000 bond is convertible into 35
shares of common stock. The bonds sold originally at par. Reported net income
for 2011was $350,000 with a 35% tax rate. The regular common and preferred
dividends were paid in 2011.

1
Compute basic
and diluted earnings per share for 2011

2011 Shares Outstanding, Ending Balance

2011 Weighted-Average Number of
Shares Outstanding

Date
Share Changes
Shares Outstanding

Dates Outstanding
Shares Outstanding
Fraction of Year
Weighted Shares

1-Jan
Beginning Balance
105,000

30-Aug
Shares sold for cash
50,000

Jan 1 – Aug 30
105,000
0.666667

70,000

31-Dec
Ending balance
155,000

Aug 30 – Dec 31
50,000
0.333333

16,666.67

Weighted-average number of shares outstanding

86,667

Preferred dividends
paid:
$ 5.2500

$ 27,563

2011 BasicEarnings
Per Share (EPS):
$ 3.72

Computation of Weighted-Average
Number of Shares Adjusted for dilutive securities

Computation of Adjusted Net Income

Net Income for the
year
$ 350,000

Weighted-average number
of shares outstanding

86,667

Add: Adjustment for interest (net of tax)
0.35

Add: Shares assumed to be issued:

8% convertible bonds
$ 400

5% preferred stock (as of beginning of
the year)
5250

8% convertible bonds (as of beginning of
the year)
8400

Adjusted net
income
$ 122,900

Weighted-average
number of shares adjusted for dilutive securities

100,317

2011 Diluted
Earnings Per Share (DEPS):

1.23

2
What is meant
by dilution of earnings per share?

Add
explanation here !!!

3
What is the
“if converted method”?

Add
explanation here !!!

 

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