Question

Porter Corporation owns all 24,000 shares of the common stock of Street, Inc. Porter has 55,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $187,000 while Street reports $149,000. Annual amortization of $17,000 is recognized each year on the consolidation worksheet based on acquisition-date fair-value allocations. Both companies have convertible bonds outstanding. During the current year, bond-related interest expense (net of taxes) is $30,000 for Porter and $21,000 for Street. Porter’s bonds can be converted into 4,000 shares of common stock; Street’s bonds can be converted into 6,000 shares. Porter owns none of these bonds.

What are the earnings per share amounts that Porter should report in its current year consolidated income statement? (Round your answers to 2 decimal places.)

Answer 1

Basic EPS—Porter Company:
Porter's reported income	187,000
Street's reported income	149,000
Amortization expense	-17,000
Consolidated net income (all to Porter)	319,000
Porter shares outstanding	55,000
Basic earnings per share ($319,000 ÷ 55,000)	5.80
Diluted EPS—Street Company
Street earnings after amortization 149,000-17000	132,000
Shares outstanding	24000
Basic earnings per share	5.5
Street's earnings assuming conversion of its bonds 132000+21,000	153,000
Street's shares assuming conversion of its bonds (24,000 + 6,000)	30000
Diluted earnings per share (153,000 ÷ 30,000)	5
Because diluted earnings per share is less than basic earnings per share, the convertible bonds are dilutive and should be included.
Porter’s share of Street’s diluted earnings:
Total shares assuming Street bond conversion	30000
Shares owned by Porter	24000
Porter's ownership percentage ` 24000/30000	80%
Street's earnings for diluted EPS (above)	153000
Porter's ownership percentage	80%
Earnings attributed to Porter company	122400
Porter’s earnings and shares for diluted EPS:
Porter's separate income	187,000
Street’s income applicable to Porter (above)	122400
Interest saved (net of tax) on assumed conversion of Porter's bonds	30,000
Diluted earnings to Porter	339,400
Porter shares outstanding	55,000
Additional shares from assumed bond conversion	4000
Diluted shares	59,000
Consolidated income statement EPS amounts for Porter Company:
Basic earnings per share (above) = $ 5.8
Diluted earnings per share ($339,400 ÷ 59,000)	5.75
Basic EPS—	5.8
Diluted EPS—	5.75