In: Accounting
Garfun, Inc., owns all of the stock of Simon, Inc. For 2018, Garfun reports income (exclusive of any investment income) of $480,000. Garfun has 80,000 shares of common stock outstanding. It also has 5,000 shares of preferred stock outstanding that pay a dividend of $15,000 per year. Simon reports net income of $290,000 for the period with 80,000 shares of common stock outstanding. Simon also has a liability for 10,000 of $100 bonds that pay annual interest of $8 per bond. Each of these bonds can be converted into three shares of common stock. Garfun owns none of these bonds. Assume a tax rate of 30 percent. What amount should Garfun report as diluted earnings per share? (Round your intermediate percentage value to the nearest whole number and the final answer to 2 decimal places.)
Diluted earnings per share=
Garfun Inc. | ||||||
Figures for Simon's diluted EPS: | ||||||
Net income | 290000 | |||||
Interest (net of tax) saved from assumed conversion | 56000 | |||||
Earnings for diluted earnings per share | 346000 | |||||
Shares outstanding | 80000 | |||||
Assumed conversion of bonds | 30000 | |||||
Subsidiary shares for parent’s share of diluted earnings | 110000 | |||||
Interest = 10000 x 100 x 8% x ( 1 - 0.3) = 56000 | ||||||
Shares controlled by Garfun = 80,000 ÷ 110,000 = 73% (rounded) | ||||||
Income to be included in parent’s diluted EPS = $346,000 × 73% = $252,580 | ||||||
10000 bonds x 3 = 30000 | ||||||
Earnings for parent’s diluted earnings per share: | ||||||
Net income—Garfun | 480000 | |||||
Dividends to Garfun's preferred stock | -15000 | |||||
Net Income included from Simon (above) | 252580 | |||||
Earnings for diluted EPS | 717580 | |||||
PARENT’S DILUTED EARNINGS PER SHARE = $717,580 ÷ 80,000 = $8.97 | ||||||