neott wrote: Correct me if I'm wrong.  I think this question has a bug because Basic EPS ignores the potential dilutive securities (in this case, convertible bonds) in calculation of Weighted Average of Common Shares Outstanding.  I got this from Item III. Complex Capital Structure (Basic & Diluted EPS) on F7 , Becker. Per my understanding, Basic EPS is used when an entity has a simple capital structure which has only common stock or nonconvertible preferred stock or nonconvertible bonds.  The 15,000 common shares converted from bonds should not be included in weighted ave. commom shares outstanding.  Instead, I would use the original 110K shares as the denominator.  Since this company has convertible bonds and preferred stocks, it should present both Basic EPS and Diluted EPS.  The Basis EPS just ignores convertible securities while the Diluted EPS assumes all convertible securities were converted during the year.  The purpose of presenting both Basic and Diluted EPS is to test if those convertible securites would really dilute EPS, if yes, use Diluted, if no, use Basic.  However, if we include that 15,000 shares converted shares in the the Basic EPS calculation, it will be diluted already and won't make a good comparison to the Diluted EPS. Therefore I think the Basic EPS should be $850K/110K shares, or $7.72, which is not among the answers.

You are correct, Neott... Potentially Convertible securities are included in calculating diluted EPS. Diluted EPS talks about securities which may be potentially converted.

But, in this case, preferred stock and 50% of the debt have already been converted into common stock.

Thus, we would be including the common stock converted from debt also in the weighted average...

Agreed. Net Income is always after the effect of interest on bonds. So, in this question, interest should have already been deducted for only 50% bonds outstanding....

We won't be adding it back !

There is no information on preferred dividends as well...

Totally correct.  Thanks divyagovil.  I was confused on the convertible bonds.  You cleared it up.

Cheers

soo u r saying that the bonds and preffered stock are converted and the profit is after that effect and there is no need to add the intrest on remaninig bonds which are left for the calculation of basic EPS .. rt?

where ru located divya???? can i get ur mail id?