Question

Plug Corporation holds 80 percent of Socket Company’s common stock. The following balance sheet data are presented for December 31, 20X7:

	Plug Corporation					Socket Company
Assets
Cash		$	103,000				$	93,000
Accounts Receivable			158,000					228,000
Inventory			310,000					310,000
Land			97,000					320,000
Buildings and Equipment			2,250,000					930,000
Less: Accumulated Depreciation			(830,000	)				(260,000	)
Investment in Socket Company			632,000
Total Assets		$	2,720,000				$	1,621,000
Liabilities and Equities
Accounts Payable		$	290,000				$	151,000
Bonds Payable			760,000					500,000
Preferred Stock ($100 par value)								180,000
Common Stock ($10 par value)			1,000,000					400,000
Retained Earnings			670,000					390,000
Total Liabilities and Equities		$	2,720,000				$	1,621,000

Socket reported net income of $124,000 in 20X7 and paid dividends of $69,000. Its bonds have an annual interest rate of 8 percent and are convertible into 33,000 common shares. Its preferred shares pay an 11 percent annual dividend and convert into 18,000 shares of common stock. In addition, Socket has warrants outstanding for 10,000 shares of common stock at $8 per share. The 20X7 average price of Socket common shares was $40.

Plug reported income of $340,000 from its own operations for 20X7 and paid dividends of $240,000. Its 10 percent bonds convert into 29,000 shares of its common stock. The companies file separate tax returns and are subject to income taxes of 40 percent.

Required:
Compute basic and diluted EPS for the consolidated entity for 20X7. (Round your intermediate calculations and final answers to two decimal places.)
  

Answer 1

Earing per shares = Earning per share are that investors use to determine wether to purchase a security, Earning per share express the net income on a per- share basis.

formula for the Earning per shares, perfered dividend are subtracted form the Net income beacuse the prefered dividend are take perioty in there patout or dividend and are not available to the common shareholders, is divided by the weighted average number of common shares outstanding.

EPS = Net income - Perfered dividend / weighted average number of common shares outstanding

PLUG CORPORATION EPS

earing per share = Net income - Perfered dividend / weighted average number of common shares outstanding

= $340,000 - 0 / 100,000 = 3.4 per share.

SOCKET CORPORATION EPS

earing per share = Net income - Perfered dividend / weighted average number of common shares outstanding

= $124,000 - $19,800 / 40,000 = 2.605 per share

perfered dividend = $180,000* 11% = 19,800

Dulited Earing per share =  dulited Earing per share is the net income on per share basis but as considered to the convertible share. dulite the earning per share by spending the earning over the other type of stock are considered, scuh as stock option, warrrants, some convertible bonds, and perfered stocks.

for the calcutation of dulited earning per share,

Dulited Earning per share = Net income - perfered dividend + interest expense( 1 - tax ) / weighted average number of common share outstanding + convertible shares

PLUG CORPORATION DEPS

Dulited Earning per share = Net income - perfered dividend + interest expense( 1 - tax ) / weighted average number of common share outstanding + convertible shares

= $340,000 - 0 - $76,000(1 - 0.40) / 100,000 + 29,000 = 2.282 per share

weighted average number of common shares = common stock 100,000 + bond convert in common stock 29,000 = 129,000 outstanding shares

SOCKET CORPORATION DEPS

Dulited earning per share = Net income - perfered dividend + interest expense( 1 - tax ) / weighted average number of common share outstanding + convertible shares
= $124,000 - $19,800 + $40,000(1 - 0.40) / 40,000 + 33,000 + 18,000 + 10,000 = 1.269 per share

weighted average number of common shares = common stock 40,000 + bond convert 33,000 + perfered convert 18,000 + warrants stock 10,000 = 101,000 outstanding shares

-- one difference in earning per share and dulited earning per share

1. earning per share not include convertable shares

dulitied earning per share is include the convertable shares

2. earing per share are not include the interest expenses (1- tax)

dulited earning per share is added the interest expenses (1- tax)

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