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effect of convertible bonds on earnings per share crystal corporation owns 60 percen 733647

Effect of Convertible Bonds on Earnings per Share

Crystal Corporation owns 60 percent of Evans Company’s common shares. Balance sheet data for the companies on December 31, 20X2, are as follows:

Crystal

Corporation

Evans

Company

Cash

$ 85,000

$ 30,000

Accounts Receivable

80,000

50,000

Inventory

120,000

100,000

Buildings & Equipment

700,000

400,000

Less: Accumulated Depreciation

(240,000)

(80,000)

Investment in Evans Company Stock

150,000

Total Assets

$895,000

$500,000

Accounts Payable

$145,000

$ 50,000

Bonds Payable

250,000

200,000

Common Stock ($10 par value)

300,000

100,000

Retained Earnings

200,000

150,000

Total Liabilities & Owners’ Equity

$895,000

$500,000

The bonds of Crystal Corporation and Evans Company pay annual interest of 8 percent and 10 percent, respectively. Crystal’s bonds are not convertible. Evans’ bonds can be converted into 10,000 shares of its company stock any time after January 1, 20X1. An income tax rate of 40 percent is applicable to both companies. Evans reports net income of $30,000 for 20X2 and pays dividends of $15,000. Crystal reports income from its separate operations of $45,000 and pays dividends of $25,000.

Required

Compute basic and diluted EPS for the consolidated entity for 20X2.

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