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Question
Pharoah Corporation is preparing earnings per share data for 2020. The net income for the year ended December 31, 2020 was $394,000 and there were 60,000 common shares outstanding during the entire year. Pharoah has the following two convertible securities outstanding:
10% convertible bonds (each $1,000 bond is convertible into 20 common shares) $117,000
3% convertible $100 par value preferred shares (each share is convertible into 2 common shares) $51,000
Both convertible securities were issued at face value in 2017. There were no conversions during 2020, and Pharoah's income tax rate is 24%. The preferred shares are cumulative. For simplicity, ignore the requirement to record the debt and equity components of the bonds separately.
Calculate the income effect of the dividends on preferred shares.
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