The Net Income for Harley's Equestrian Show Jumping Co

question 26

Essay

The net income for Harley's Equestrian Show Jumping Co.for the year ended December 31,2015 was $1,400,000.Harley had 30,000 ordinary shares outstanding at the beginning of the year.Harley declared and distributed a 3-for-1 stock split on May 1,2015 and issued (sold)40,000 ordinary shares on November I,2015.Select details of Harley's liabilities and equities follow:
• Bonds-$1,400,000,11%,10-year,semi-annual bonds issued on July 1,2015.At the option of the holder,each $1,000 bond can be converted into 20 ordinary shares at any time before expiry.
• Bonds B-$1,500,000,9%,semi-annual bonds maturing September 30,2019.The owners of the bonds elect to convert them into 25,500 ordinary shares on December 1,2015.
• 50,000 cumulative preferred shares that are each entitled to dividends of $20.00 per annum.Dividends are not declared in 2015.
• Harley's corporate tax rate was 30%.The recorded conversion factor for the convertible bonds has already been adjusted for the stock split.
Requirements:
Assuming that the effective rate of interest on the bonds equals the coupon rate:
a.Calculate Harley's basic earnings per share for 2015.
b.Prepare a schedule that sets out the income effect,share effect,and incremental BPS for each security that is convertible into ordinary shares.Rank the potential ordinary shares by their dilutiveness.
c.Calculate Harley's diluted earnings per share for 2015.

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Definitions:

Psychological Process

The mental functions and actions by which an individual perceives, thinks, feels, and behaves.

Uncertainty

A state of having limited knowledge where it is impossible to exactly describe the existing state, future outcome, or more than one possible outcome.

Critical Thinking Skill

The intellectual ability to analyze information, evaluate evidence, and understand arguments independently and thoughtfully.

Dominance Structuring

The organization or arrangement of elements within a system that establishes a hierarchy of control or influence.