Question

Primus, Inc., owns all outstanding stock of Sonston, Inc. For the current year, Primus reports net income (exclusive of any investment income) of $528,000. Primus has 50,000 shares of common stock outstanding. Sonston reports net income of $128,000 for the period with 40,000 shares of common stock outstanding. Sonston also has 5,000 stock warrants outstanding that allow the holder to acquire shares at $14.00 per share. The value of this stock was $28 per share throughout the year. Primus owns 2,100 of these warrants. What amount should Primus report for diluted earnings per share?

Answer 1

Determination of the amount that Primus should report for diluted earnings per share:

• Computation of Sonston’s EPS

Net Income		$128,000
Shares:
Outstanding	40,000
Assumed conversion of stock warrants	5,000
repurchase of treasury stock with proceeds of stock warrants	(2,500)
(5,000 x $14)/$28 =2,500
Shares for primary earnings per share computation		42,500
Shares held by Primus	40,000 + 42% of 2,500	41,050	(2,100/5,000 = 42%)
Proportion of shares held by Primus	41,050/42,500	97.74%
Income to be reported in consolidated diluted earnings per share		$128,000 x 96.58%	$123,633
Consolidated diluted earnings per share:
Primus net income		$528,000
net income from Sonston		$123,633
Total		$651,633
outstanding shares of Primus	50,000
Consolidated diluted earnings per share:		$651,633/50,000	$13.03