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The following separate income statements are for Burks Company and its 80 percent–owned subsidiary, Foreman Company:...

The following separate income statements are for Burks Company and its 80 percent–owned subsidiary, Foreman Company: Burks Foreman Revenues $ (448,000 ) $ (348,000 ) Expenses 273,000 249,000 Gain on sale of equipment 0 (39,000 ) Equity earnings of subsidiary (73,000 ) 0 Net income $ (248,000 ) $ (138,000 ) Outstanding common shares 60,000 40,000

Additional Information Amortization expense resulting from Foreman’s excess acquisition-date fair value is $49,000 per year. Burks has convertible preferred stock outstanding. Each of these 16,000 shares is paid a dividend of $5 per year. Each share can be converted into five shares of common stock. Stock warrants to buy 20,000 shares of Foreman are also outstanding. For $20, each warrant can be converted into a share of Foreman’s common stock. The fair value of this stock is $25 throughout the year. Burks owns none of these warrants. Foreman has convertible bonds payable that paid interest of $54,000 (after taxes) during the year. These bonds can be exchanged for 14,000 shares of common stock. Burks holds 20 percent of these bonds, which it bought at book value directly from Foreman.

Compute basic and diluted EPS for Burks Company. (Round your intermediate percentage value and final answer to 2 decimal places.)

Solutions

Expert Solution

Answer:

Calculate basic and diluted EPS for Burks Company:

Basic EPS:

Earnings per share = (Net income - Preferred Dividends)/Average number of common shares outstanding

Particulars Amount
Net income (Burks Company) (248000-73000) 175000
Add: Net income (Foreman Company) ((138000-49000)*80%) 71200
Less: Preferred stock dividend (16000*5) (80000)
Earnings applicable to basic EPS (A) 166200
Outstanding common shares (B) 60000
Basic EPS (A/B) $2.77

Calculate Diluted EPS:

net income ( 138000 - 40000 amortization) 98000

shares outstanding 40000

conversion warrants 20000

proceeds of conversion ( 16000)

(20000 * 20) / 25

shares for diluted EPS 54000

shares controlled by parent

( 40000 * 80) = 32000

income used in diluted EPS computation 98000

32000 / 54000 = 59.26%

98000 * 59.26% = 58075

reported net income 175000 + 58075 = 233075

outstanding shares 60000

conversion preferred stock (16000 * 5 ) 80000

shares for diluted EPS 140000

Diluted EPS = 233075 / 140000 = 1.66

ekkarill92 answered 2 years ago
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