1. ABC was formed on June 30, 2011, through the issuance of 2,500,000 shares of common stock to owners. The company had the following transactions during 2014. On April 1, 2014, the company issued an additional 500,000 shares of stock for cash. On July 1, 2014, ABC issued $1 million of 15-year, 6% convertible bonds at par. Each $1,000 bond converts to 25 shares of common at any interest date. None of the bonds have been converted to date. ABC is preparing its annual report for the fiscal year ending December 31, 2014, and will report after-tax net income of $13,600,000. The tax rate is 40%. Determine the following for 2014.
(a) The number of shares to be used for calculating:
(1) Basic earnings per share.
(2) Diluted earnings per share.
(b) The earnings figures to be used for calculating:
(1) Basic earnings per share.
(2) Diluted earnings per share.
2. XYZ Corporation earned $2,650,000 during 2014. The company had an average of 520,000 shares of common stock outstanding. The average market price of common stock was $32 per share during the year. The company also had 50,000 warrants outstanding, of which two warrants could be exercised to purchase one share of common stock for $30 in total.
(a) Are the warrants dilutive?
(b) Compute basic earnings per share.
(c) Compute diluted earnings per share.
3. On January 1, 2014, Green Company issued 15-year, $50,000,000 face value, 4% convertible preferred stock, at par. Each $1,000 preferred stock is convertible into 20 shares of Green's common stock. None of the preferred stocks were converted in 2014. Green's net income in 2014 was $8,680,000, and its tax rate was 30%. The company had 2,650,000 shares of common stock issued and outstanding throughout 2014. Compute diluted earnings per share for 2014.
4. ABC Inc. requires funding to build a new factory and has decided to raise the additional capital by issuing $850,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of 5 warrants for each $1,000 bond sold. The value of the bonds without the warrants is considered to be $775,000, and the value of the warrants in the market is $75,000. The bonds sold in the market at issuance for $825,000.
a) What entry should be made at the time of the issuance of the bonds and warrants?
b) If the warrants were nondetachable, would the entries be different? Discuss.