**Exercise 19-21: EPS; Convertible Preferred Stock; Convertible Bonds; Order of Entry [LO19-7, 19-9]**Information from the financial statements of Ames Fabricators, Inc., included the following:| | December 31 ||---------------------------|---------------------------------|| | 2021 | 2020 || **Common shares** | 100,000 | 100,000 || **Convertible preferred shares (convertible into 32,000 shares of common)** | 12,000 | 12,000 || **8% convertible bonds (convertible into 30,000 shares of common)** | $1,200,000 | $1,000,000 |Ames’s net income for the year ended December 31, 2021, is $500,000. The income tax rate is 25%. Ames paid dividends of $5 per share on its preferred stock during 2021.**Required:**Compute basic and diluted earnings per share for the year ended December 31, 2021. _(Enter your answers in thousands. For example, 100,000 should be entered as 100). Do not round intermediate calculations._| Numerator | / | Denominator | = | Earnings per Share ||---------------|---------|-------------------|-------------|---------------------|| **Basic** | | | | || **Diluted** | | | | |---### Explanation: **Basic Earnings Per Share (EPS):** Basic EPS is calculated by dividing the net income available to common shareholders by the average number of common shares outstanding during the period.**Diluted Earnings Per Share (EPS):**Diluted EPS considers the potential dilution that could occur if securities, such as convertible preferred shares or bonds, are converted into common stock. It provides a "worst-case" scenario where these options are converted, reflecting the smallest EPS value.In this context, this exercise requires you to calculate both forms of EPS using the given financial data, considering the added complexity of convertible securities.

Earnings per share is the earnings of the business that is being earned by the each shareholder. Basic earnings per share = (Net Income - Preference dividends) / Number of outstanding shares Diluted earnings per share is the earnings that is being diluted by the issue of convertible preference shares or convertible bonds. Basic EPS = (Net income - preferred dividend)/shares outstanding = [500,000 - (12,000 x 5)]/100,000 = $4.40 per share Diluted EPS = [Net income - preferred dividend - Bonds interest (net of tax)]/shares outstanding including convertible instruments = [500,000 - (12,000 x 5) - (1,000,000 x 8% x (1 - 0.25)]/(100,000 + 32,000 + 30,000) = 380,000/162,000 = $2.3457 per share