The Ottey Corporation issued 10-year, $4,000,000 par, 7% callable convertible subordinated debentures on January 2, 2022. The bonds have a par value of $1,000, with interest payable annually. The interest expense recorded on the liability component of the convertible bond for 2022 was $320,000. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Ottey’s effective tax was 35%. Net income in 2022 was $7,500,000, and the company had 2,000,000 shares outstanding during the entire year.

Instructions

a. Prepare a schedule to compute both basic and diluted earnings per share.

b. Discuss how the schedule would differ if the security was convertible preference shares.