The Net Income for Cedarsprings Retreat Centre for the Year

question 21

Essay

The net income for Cedarsprings Retreat Centre for the year ended December 31, 2020, was $800,000. Cedarsprings had 50,000 ordinary shares outstanding at the beginning of the year. Cedarsprings declared and distributed a three-for-one stock split on May 1, 2020 and issued (sold)30,000 ordinary shares on November 1, 2020. Select details of Cedarsprings' liabilities and equities follow:
Bonds A-$2,000,000, 6%, 10-year, semi-annual bonds issued on July 1, 2020. At the option of the holder, each $1,000 bond can be converted into 14 ordinary shares at any time before expiry.
Bonds B-$2,000,000, 5%, semi-annual bonds maturing September 30, 2024. The owners of the bonds elect to convert them into 12,000 ordinary shares on December 1, 2020.
200,000 cumulative preferred shares that are each entitled to dividends of $2.00 per annum. Dividends are not declared in 2020. Cedarsprings' corporate tax rate was 40%. The recorded conversion factor for the convertible bonds has already been adjusted for the stock split.
Required: Assuming that the effective rate of interest on the bonds equals the coupon rate:
a)Calculate Cedarsprings' basic earnings per share for 2020.
b)Prepare a schedule that sets out the income effect, share effect, and incremental EPS for each security that is convertible into ordinary shares. Rank the potential ordinary shares by their dilutiveness.
c)Calculate Cedarsprings' diluted earnings per share for 2020.

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