Question

Poppy Corporation owns 60 percent of Seed Company’s common shares. Balance sheet data for the companies on December 31, 20X2, are as follows:

	Poppy Corporation					Seed Company
Assets
Cash		$	89,000				$	39,000
Accounts Receivable			90,000					53,000
Inventory			118,000					95,000
Buildings and Equipment			690,000					380,000
Less: Accumulated Depreciation			(240,000	)				(74,000	)
Investment in Seed Company Stock			138,000
Total Assets		$	885,000				$	493,000
Liabilities and Owners’ Equity
Accounts Payable		$	95,000				$	63,000
Bonds Payable			250,000					200,000
Common Stock ($10 par value)			300,000					100,000
Retained Earnings			240,000					130,000
Total Liabilities and Owners’ Equity		$	885,000				$	493,000

The bonds of Poppy Corporation and Seed Company pay annual interest of 8 percent and 10 percent, respectively. Poppy’s bonds are not convertible. Seed’s bonds can be converted into 10,000 shares of its company stock any time after January 1, 20X1. An income tax rate of 40 percent is applicable to both companies. Seed reports net income of $34,000 for 20X2 and pays dividends of $18,000. Poppy reports income from its separate operations of $50,000 and pays dividends of $22,000.

Required:
Compute basic and diluted EPS for the consolidated entity for 20X2. (Round your answers to 2 decimal places.)
  

Answer 1

	Poppy Corporation	Seed Corporation
Bonds Payable	2,50,000	2,00,000
Annual Interest	8%	10%
Interest on Bonds (Bonds Payable * Annual Interest %)	20,000	20,000
Net Income	50,000	34,000
Interest on Bonds	20,000	20,000
Profit before Interest on Bonds	70,000	54,000

Basic EPS	Poppy Corporation	Seed Corporation
Profit before Interest on Bonds	70,000	54,000
Interest on Bonds	20,000	20,000
Net Income / Profit Before Tax	50,000	34,000
Tax @ 40%	20,000	13,600
Profit for the Financial Year 20X2	30,000	20,400
Dividend	22,000	18,000
	8,000	2,400
Profit for the Financial Year 20X2	30,000	20,400
Common Stock ($10 Par Value)	3,00,000	1,00,000
Number of Common Stock (Common Stock ÷ 10)	30,000	10,000
Basic Earning Per Share (Profit ÷ Number of Common stock)	1.00	2.04

Diluted EPS	Poppy Corporation	Seed Corporation
Net Income / Profit Before Tax	50,000	34,000
Interest on Bonds (Seed Corporation Bonds are Convertible hence add to profit) (20000*60% Tax effect)		12,000
Net Profit Attributable	50,000	46,000
Number of Equity Shares	30,000	10,000
Convertible Bonds (Seed corporation Bonds are Convertible into 10,000 Shares since Last Year )	-	10,000
Total Number of Equity Shares	30,000	20,000
Diluted EPS (Poppy Corporation (50000 ÷ 30000) (Saeed Corporation (46000 ÷ 20000)	1.67	2.30