Madsen Company had five convertible securities outstanding during all of 2007. It paid the appropriate interest (and amortized any related premium or discount using the straight-line method) and dividends on each security during 2007. Each of the convertible securities is described in the following table:
10.2% bonds $200,000 face value. Issued at par. Each $1,000 bond is convertible into 28 shares of common stock.
12.0% bonds $160,000 face value. Issued at 110. Premium being amortized over 20-year life. Each $1,000 bond is convertible into 47 shares of common stock.
9.0% bonds $200,000 face value. Issued at 95. Discount being amortized over 10-year life. Each $1,000 bond is convertible into 44 shares of common stock.
8.3% preferred stock $120,000 par value. Issued at 108. Each $100 par preferred stock is convertible into 3.9 shares of common stock.
7.5% preferred stock $180,000 par value. Issued at par. Each $100 par preferred stock is convertible into 6 shares of common stock.
Net income for 2007 totaled $119,460. The weighted average number of common shares outstanding during 2007 was 40,000 shares. No share options or warrants are outstanding. The effective corporate income tax rate is 30%.
1. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share.
2. Prepare a ranking of the order in which each of the convertible securities should be included in diluted earnings per share.
3. Compute basic earnings per share.
4. Compute diluted earnings per share.
5. Indicate the amount(s) of the earnings per share that Madsen Company would report on its 2007 income statement.