Chapter 20, Problem 20.11E

Computing Basic and Diluted EPS, Convertible Bonds, Options, Convertible Preferred Stock, Antidilution, Disclosures. We present Gamba Incorporated’s current-year partial income statement:

Gamba is subject to a 35% income tax rate.

Partial Income Statement	Current Year
Income from Continuing Operations	$1,250,990
Discontinued operations—Income, net of tax	533,060
Net Income	$1,784,050

A partial balance sheet for the current year follows.

Partial Balance Sheet	Current Year
Liabilities:
5% Convertible Debt - Issued at $1,000 par*	$8,113,000
Stockholders’ Equity:
Common Stock, no par (1,032,000 shares issued and outstanding)* *	$5,160,000
$3 Convertible Preferred Stock. $100 par value (42, 500 shares issued and outstanding)***	4,250,000
Additional Paid-in Capital—Stock Options (employee options to acquire 167,500 shares)****	(1,842,500)

Footnotes to the Balance Sheet:

*    Each bond is convertible into 80 shares of common stock. The bonds are outstanding all year

**     The number of shares issued and outstanding did not change throughout the year.

***    Each preferred share is convertible into eight shares of common stock. The firm declared preferred dividends The preferred stock was outstanding all year.

*****     The options are exercisable at $21 per share and the average market price of the company’s stock for the year is $35. The options were outstanding all year.

Required

1. a. Based on the information provided, compute basic and diluted earnings per share for the current year Include all computations related to the application of antidilution sequencing if needed.
2. b. Prepare the income statement disclosures required beginning with income from continuing operations.