Question

Porter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 70,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $243,000 while Street reports $170,000. Annual amortization of $14,000 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 $44,000 for Porter and $36,000 for Street. Porter’s bonds can be converted into 7,000 shares of common stock; Street’s bonds can be converted into 10,000 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?

Basic Earnings Per Share and Diluted Earnings Per Share

Answer 1

Basic Earnings per share
Net income of Porter	243,000
Net income of Street	170,000
Less: Annual amortization	(14,000)
Consolidated Net income Reported By Porter	399,000
Divided by: Number of Porter shares outstanding	70,000
Basic Earnings per share	$               5.70
Is Convertible bond of Street Diluted?
Street Earning After Amortization (170000-14000)	156,000
Divided by: Number of common share	30,000
Basic Earnings per share for Street	5.20
Street Earning After Amortization and including Interest net of Tax (170000-14000+36000)	192,000
Divided by: If Convertible bond Converted into common stock then Number of Common stock (30000+10000)	40,000
Diluted Earnings per share for Street	$               4.80
Convertible bond of Street is Diluted Because of Diluted Earnings per share for Street is less than Basic Earnings per share for Street. So It is Consider for Diluted Purpose.
Diluted Earnings per share
If Convertible bond Converted into common stock then Number of Common stock (30000+10000)	40,000
Number of Share Owned by Porter	30,000
Percentage of Ownership in Street (30000/40000)	75%
Street Earning After Amortization and including Interest net of Tax (170000-14000+36000)	192,000
Multiply : Percentage of Ownership in Street	75%
Income Attribute to Porter	144,000
Is Convertible bond of Porter Diluted?
Interest saved on Net of tax	44,000
Divided by: Number of Common share for Convertible bond	7,000
Incremental Earning per share	$               6.29
Convertible bond of Porter is anti-diluted Because of Incremental Earning per share is More than Basic Earnings per share. Hence It is Excluded for calculation OF diluted Purpose.
Net income of Porter	243,000
Income Attribute to Porter	144,000
Total Income For Diluted EPS	387,000
Divided by: Number of Share without Convertible Bond	70,000
Diluted Earnings per share	$               5.53
Answer Summary
Basic Earnings per share	$               5.70
Diluted Earnings per share	$               5.53