The following information relates to the December 31, 2010, balance sheet for Chiapucci Incorporated. 6% convertible 10-year

Question:

The following information relates to the December 31, 2010, balance sheet for Chiapucci Incorporated.

6% convertible 10-year debentures issued at par . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000

Common stock, $12 par, 110,000 shares issued and outstanding . . . . . . . . . . . . . . . $1,320,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 842,000

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,162,000

The convertible debentures include terms stating that each $1,000 bond can be converted into 30 shares of common stock.

The following events occurred during 2011.

(a) On August 31, 2011, the complete issue of convertible debentures was converted into common stock.

(b) Chiapucci reported net income of $540,000 in 2011. The company’s income tax rate was 30%.

Instructions:

1. Compute basic and diluted EPS for the year ended December 31, 2011.

2. Assume that Chiapucci had a net loss of $220,000. Show why the convertible debentures are anti-dilutive under loss conditions.

Debentures
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