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* Question 2 Sheridan Inc. has 1.05 million common shares outstanding as at January 1, 2020. On June 30, 2020, 4% convertible bonds were converted into 110,000 additional shares. Up to that point, the bonds had paid interest of $940,000 after tax. Net income for the year was $1,298,988. During the year, the company issued the following: 1. 2. June 30: 11,200 call options giving holders the right to purchase shares of the company for $30 Sept. 30: 16,200 put options allowing holders to sell shares of the company for $25 On February 1, Sheridan also purchased in the open market 11,200 call options on its own shares, allowing it to purchase its own shares for $27. Assume the average market price for the shares during the year was $35. Assume further the following: 1. On September 30, 220,000 convertible preferred shares were redeemed. If they had been converted, these shares would have resulted in an additional 110,000 common shares being issued. The shares carried a dividend rate of $3 per share to be paid on September 30. No conversions have ever occurred. There are 9,400 of $1,000, 10% convertible bonds outstanding with a conversion rate of three common shares for each bond starting January 1, 2021. Beginning January 1, 2024, the conversion rate is six common shares for each bond; and beginning January 1, 2028, it is nine common shares for each bond. The tax rate is 30%. 2. Calculate weighted common shares outstanding. Weighted common shares outstanding Calculate the income effect of the dividends on preferred shares. Dividends on preferred shares $ Calculate the basic earnings per share under IFRS. For simplicity, ignore the impact that would result from the convertible debt being a hybrid security. (Round answer to 2 decimal places, e.g. 15.25.) Basic EPS Determine an incremental per share effect for $3 preferred shares. Incremental Denominator Effect EPS Incremental Potentially dilutive security Numerator Effect $3 Preferred shares Calculate the after-tax interest paid on the 10% bonds. After-tax interest on bonds converted Determine an incremental per share effect for 10% bonds. (Round earnings per share to 2 decimal places, e.g. 15.25.) Incremental Denominator Effect EPS Incremental Potentially dilutive security Numerator Effect $3 Preferred shares $ Calculate the after-tax interest paid on the 10% bonds. After-tax interest on bonds converted $ Determine an incremental per share effect for 10% bonds. (Round earnings per share to 2 decimal places, e.g. 15.25.) EPS Incremental Incremental Potentially dilutive security Numerator Effect Denominator Effect 10% Bonds Calculate pro-rated incremental shares from assumed exercise of 11,200 options. Pro-rated incremental shares Rank the potentially dilutive securities from most dilutive to least dilutive. $3% Preferred shares 10% Bonds Options Calculate the diluted EPS numbers under IFRS. For simplicity, ignore the impact that would result from the convertible debt being a hybrid security. (Round earnings per share to 2 decimal places, e.g. 15.25.) Numerator Denominator EPS Basic Call Options Diluted EPS Show the required presentations on the face of the income statement. (Round answers to 2 decimal places, e.g. 15.25.) Sheridan Inc. Partial Income Statement Earnings Per Common Share: Basic Earnings Per Share Diluted Earnings Per Share $ * Question 2 Sheridan Inc. has 1.05 million common shares outstanding as at January 1, 2020. On June 30, 2020, 4% convertible bonds were converted into 110,000 additional shares. Up to that point, the bonds had paid interest of $940,000 after tax. Net income for the year was $1,298,988. During the year, the company issued the following: 1. 2. June 30: 11,200 call options giving holders the right to purchase shares of the company for $30 Sept. 30: 16,200 put options allowing holders to sell shares of the company for $25 On February 1, Sheridan also purchased in the open market 11,200 call options on its own shares, allowing it to purchase its own shares for $27. Assume the average market price for the shares during the year was $35. Assume further the following: 1. On September 30, 220,000 convertible preferred shares were redeemed. If they had been converted, these shares would have resulted in an additional 110,000 common shares being issued. The shares carried a dividend rate of $3 per share to be paid on September 30. No conversions have ever occurred. There are 9,400 of $1,000, 10% convertible bonds outstanding with a conversion rate of three common shares for each bond starting January 1, 2021. Beginning January 1, 2024, the conversion rate is six common shares for each bond; and beginning January 1, 2028, it is nine common shares for each bond. The tax rate is 30%. 2. Calculate weighted common shares outstanding. Weighted common shares outstanding Calculate the income effect of the dividends on preferred shares. Dividends on preferred shares $ Calculate the basic earnings per share under IFRS. For simplicity, ignore the impact that would result from the convertible debt being a hybrid security. (Round answer to 2 decimal places, e.g. 15.25.) Basic EPS Determine an incremental per share effect for $3 preferred shares. Incremental Denominator Effect EPS Incremental Potentially dilutive security Numerator Effect $3 Preferred shares Calculate the after-tax interest paid on the 10% bonds. After-tax interest on bonds converted Determine an incremental per share effect for 10% bonds. (Round earnings per share to 2 decimal places, e.g. 15.25.) Incremental Denominator Effect EPS Incremental Potentially dilutive security Numerator Effect $3 Preferred shares $ Calculate the after-tax interest paid on the 10% bonds. After-tax interest on bonds converted $ Determine an incremental per share effect for 10% bonds. (Round earnings per share to 2 decimal places, e.g. 15.25.) EPS Incremental Incremental Potentially dilutive security Numerator Effect Denominator Effect 10% Bonds Calculate pro-rated incremental shares from assumed exercise of 11,200 options. Pro-rated incremental shares Rank the potentially dilutive securities from most dilutive to least dilutive. $3% Preferred shares 10% Bonds Options Calculate the diluted EPS numbers under IFRS. For simplicity, ignore the impact that would result from the convertible debt being a hybrid security. (Round earnings per share to 2 decimal places, e.g. 15.25.) Numerator Denominator EPS Basic Call Options Diluted EPS Show the required presentations on the face of the income statement. (Round answers to 2 decimal places, e.g. 15.25.) Sheridan Inc. Partial Income Statement Earnings Per Common Share: Basic Earnings Per Share Diluted Earnings Per Share $