Question

Poison Corporation holds 70 percent of Snake Company’s voting common shares but none of its preferred shares. Summary balance sheets for the companies on December 31, 20X1, are as follows:

	Poison Corporation					Snake Company
Assets
Cash		$	20,000				$	29,000
Accounts Receivable			32,000					42,000
Inventory			120,000					74,000
Buildings and Equipment			295,000					215,000
Less: Accumulated Depreciation			(138,000	)				(63,000	)
Investment in Snake Company			123,900
Total Assets		$	452,900				$	297,000
Liabilities and Owners’ Equity
Accounts Payable		$	77,900				$	64,000
Wages Payable			40,000
Preferred Stock			100,000					56,000
Common Stock ($10 par value)			120,000					100,000
Retained Earnings			115,000					77,000
Total Liabilities and Owners’ Equity		$	452,900				$	297,000

Neither of the preferred issues is convertible. Poison’s preferred pays a 9 percent annual dividend and Snake’s preferred pays a 10 percent dividend. Snake reported net income of $48,000 and paid a total of $20,000 of dividends in 20X1. Poison reported $62,000 of income from its separate operations and paid total dividends of $46,000 in 20X1.

Required:
Compute 20X1 consolidated EPS. Ignore any tax consequences. (Round your answer to 2 decimal places.)
  

Answer 1

Data given:

1. Common Stock

Poison Corp's Common stock = $120,000/$10 = 12000 shares

Snake Co's Common stock = $100,000/$10 = 10000 shares

Poison Corp owned Common stock in Snake Co. = 10000 shares *70% = 7000 shares

2. Preferred Stock Dividend

Posion Corp = $100,000 * 9% = $9,000

Snake Co = $56,000 * 10%= $5,600

3.Net Income which is the Adjusted Net income in abscence of any information :

Posion Corp - 62,000$

Snake Co - 48,000$

Subsidiary Basic EPS = ( Adjusted Net Income of Subsidiary - Preferred Stock Dividend ) / Subsidiary Common shares outstanding

Therefore Basic EPS of Snake Co. = (48000 - 5,600)$ / 10,000 shares = $ 4.24

Consolidated Basic EPC = [ (Parent Adjusted Net Income generated Internally - Parent Preferreed Stock Dividend) + (Parent Owned Subsidiary Common shares * Subsidiary EPS) ] / Parent Common shares outstanding

Therefore Consolidated EPS of Poison Corp = (62,000 - 9,000)$ + (7,000 shares * 4.24) / 12,000 shares = $ 6.89