1. The Johnson Company is computing diluted earnings per share for the current year.

The
company has convertible bonds outstanding that have been judged as being anti-dilutive.
What is the significance of anti-dilution?
A The bonds must be included in the computation of diluted earnings per share.
B Because of the high rate of interest on these bonds, the impact must be separately
disclosed within the computation.
C Inclusion of the bonds in the computation must be made using the most conservative
method.
D Inclusion of the bonds in the computation will cause the reported figure to increase so
that the potential conversion of the bonds should be excluded.
2. The Pfeiffer Corporation reports net income in the current year of $800,000. Pfeiffer had a
nonconvertible preferred stock paying $70,000 in cash dividends. Another $2.00 per share in
dividends was paid to the common stockholders. There are 190,000 shares of this common
stock outstanding throughout the year. In addition, the company has 20,000 stock options
outstanding. For $2, each option can be converted into one share of common stock. The
average price of the stock during the year was $8. The company has an effective tax income
rate of 20 percent. What is Pfeiffer's diluted earnings per share (rounded)?
A $3.48
B $3.56
C $3.68
D $3.76
3. For Year One, the Seeger Corporation reports net income of $520,000. The company has
10,000 shares of nonconvertible preferred stock outstanding paying $4 per share each year
in cumulative dividends. The company has 300,000 shares of common stock outstanding
throughout the current year. In addition, the company issued 9,000 convertible bonds at
face value several years ago. Each bond has a face value of $100 and is convertible into 4
shares of common stock. These bonds pay interest of 6 percent per year. The effective
income tax rate is 20 percent. What is diluted earnings per share (rounded) for Year One?
A $1.50
B $1.52
C $1.56
D $1.60
4. A company has 200,000 shares of common stock outstanding on January 1 of the current
year but issues another 40,000 shares on July 1. In addition, the company has 20,000 shares
of preferred stock that pays a $3 per share dividend each year. These shares can each be
converted into three shares of the company's common stock. The company reports net
income for the current year of $940,000. It has an effective tax rate of 30 percent. What is
diluted earnings per share (rounded)?
A $3.29
B $3.36
C $3.40
D $3.42

5.

Officials for the Lexington Company are preparing financial statements for Year One. The
company is reporting net income of $900,000. The company had 100,000 shares of common
stock outstanding at the beginning of the year but a stock split on October 1 doubled that
number to 200,000. In the previous year, the company issued 10,000 convertible bonds with
a face value of $1,000 each that will come due in ten years. Each bond is convertible into 15
shares of common stock (adjusted for the stock split). These bonds pay 4 percent interest
but were sold for 93 percent of face value to generate a higher interest rate for the buyers.
The tax rate for the company is assumed to be 30 percent. The bond discount is being
amortized by the straight-line method. What should the company report as its diluted
earnings per share (rounded)?
A $3.51
B $3.55
C $3.67
D $3.81

6. The Pacioli Corporation reports net income for Year One of $800,000. The company had
155,000 shares of common stock outstanding for the entire year as well as 90,000 shares of
preferred stock. The common stock was paid $1 per share as a dividend while the preferred
shareholders received $2 per share. The common stock had an average price for the year of
$40 per share while the preferred stock had an average price of $60 per share. The company
also had 20,000 stock options outstanding for the year. For $10, each option could be
converted into a share of common stock. The effective tax rate is 25 percent. What should
the company report as its diluted earnings per share (rounded) for Year One?
A $3.54
B $3.65
C $3.77
D $3.81
7. A corporation has 100,000 shares of common stock outstanding and 20,000 shares of
nonconvertible preferred stock. A dividend of $1 per share is distributed on the common
stock and one of $2 per share is distributed on the preferred stock. Net income is $400,000
and the tax rate is 20 percent. The corporation also has 10,000 bonds with a face value of
$100 and an interest rate of 4 percent. Each bond is convertible into two shares of common
stock although none have yet been converted. The bonds were issued several years ago at
face value. What is reported as diluted earnings per share (rounded)?
A $2.80
B $3.27
C $3.33
D $3.60