Question

Porter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 65,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $197,000 while Street reports $157,000. Annual amortization of $16,000 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 $39,000 for Porter and $31,000 for Street. Porter’s bonds can be converted into 8,000 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? (Round your answers to 2 decimal places.)

Answer 1

Calculation:

Diluted EPS of street co.

Street earnings after amortization [157000-16000]	141000
Shares	30000
Basic EPS [141000/30000]	4.7$
Streets earning before bond interest [141000+31000$ interest saved if bond converted]	172000
Shares after bond conversion [30000+10000 converted bonds]	40000
diluted EPS [172000/40000]	4.3 $

bonds are dilutive as diluted EPS is less than basic EPS.

Porter's share in diluted EPS of street co.

Total shares of street co after conversion	40000
Porter's shares	30000
Porter's share [30000/40000]	75%
Porter's earning share in street co.[172000*75%]	129000

Diluted EPS

Porter's Income	197000
Share in street co as above step 2	129000
Interest saved after bond conversion	39000
diluted earnings [197000+129000+39000]	365000
Porter shares	65000
Bond converted	8000
Dilute shares [65000+8000]	73000

ANSWER DILUTED EPS = 365000/73000

=5 $