Smith Instruments reported $6,000,000 in net income for the current year. The company had $500,000 of 10% cumulative, non-convertible preferred stock outstanding all year, and issued, $5,000,000 of 6% convertible bonds issued on June 1. Each $1,000 bond is convertible into 40 shares of common stock. 200,000 common shares were outstanding all year. Determine the denominator for both basic and

diluted EPS when the tax rate is 40%.

A) basic EPS 200,000; diluted EPS 200,000 + (5,000 × 40) (5/12)
B) basic EPS 200,000 (7/12); diluted EPS 200,000 + (5,000 × 40) (7/12)
C) basic EPS 200,000; diluted EPS 200,000 + (5,000 × 40) (7/12)
D) basic EPS 200,000 (5/12); diluted EPS [200,000 + (5,000 × 40)] (5/12)

Answer: C