In: Accounting
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 $253,000 while Street reports $201,000. Annual amortization of $12,000 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 $55,000 for Porter and $51,000 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.)
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Solution
Porter Corporation
Determination of the earnings per share that Porter should report in its current year consolidated income statement:
Porter’s reported income $253,000
Street’s reported income $201,000
Amortization expense ($12,000)
Consolidated net income $442,000
Porter’s Shares outstanding 65,000
Basic earnings per share $6.80 ($442,000/65,000 = $6.80)
Street’s reported income $201,000
Less: amortization expense $12,000
Income after amortization $189,000
Shares outstanding in Street 30,000
Basic EPS $6.30 ($189,000/30,000 = $6.30)
Street’s Earnings assuming conversion of its bonds - $189,000 + $51,000 (interest savings after tax) = $240,000
Street’s share assuming conversion of its bonds (30,000 + 10,000) = 40,000
Diluted EPS $6.00 ($240,000/40,000 = $6.00)
Since diluted EPS ($6.00) is less compared to basic EPS ($6.30), the convertible bonds are dilutive hence should be included.
Computation of Porter’s Share in Street’s diluted earnings –
Total shares assuming bond conversion 40,000
Shares held by Porter 30,000
Porter’s Ownership percent 75%
Street’s earnings for diluted EPS $240,000
Porter’s ownership share $180,000 (240,000 x 75%)
Porter’s earnings and number of shares for diluted EPS –
Porter’s reported income $253,000
Porter’s income in Street $180,000
Interest saved (after tax) on assumed conversion of Porter’s bonds $55,000
Porter’s Diluted Earnings $488,000
Porter’s outstanding shares 65,000
Add: shares from assumed bond conversion 8,000
Diluted shares 73,000
Diluted earnings per share $6.68 ($488,000/73,000)
Hence,
Porter Company Consolidated Income Statement
Earnings per Share $6.80
Diluted Earnings per share $6.68