Question

Porter Corporation owns all 26,000 shares of the common stock of Street, Inc. Porter has 60,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $211,000 while Street reports $161,000. Annual amortization of $18,000 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 $46,000 for Porter and $45,000 for Street. Porter’s bonds can be converted into 10,000 shares of common stock; Street’s bonds can be converted into 14,000 shares. Porter owns none of these bonds.

Basic EPS: 5.90

What are the DILUTED earnings per share amounts that Porter should report in its current year consolidated income statement? (Round your answers to 2 decimal places.)

Answer 1

      Basic EPS—Porter Company:

            Porter's reported income ...............................................        $211,000

            Street's reported income ...............................................           161,000

            Amortization expense .....................................................            (18,000)

                  Consolidated net income (all to Porter)................        $354,000

                  Porter shares outstanding ......................................             60,000

            Basic earnings per share ($354,000 ÷ 60,000) ..........               $5.90

      Diluted EPS—Street Company

            Street earnings after amortization................................        $143,000

            Shares outstanding .........................................................             26,000

            Basic earnings per share (143,000 ÷ 26,000) ............               $5.50                       

            Street's earnings assuming conversion of its bonds

                  ($143,000 + $45,000 interest saved net of tax) ....        $188,000

            Street's shares assuming conversion of its bonds

                  (26,000 + 14,000) .........................................................             40,000

            Diluted earnings per share (188,000 ÷ 40,000) .........               $4.70

Because diluted earnings per share is less than basic earnings per share, the convertible bonds are dilutive and should be included.

      Porter’s share of Street’s diluted earnings:

            Total shares assuming Street bond conversion .....             40,000

            Shares owned by Porter.................................................             26,000

            Porter's ownership percentage (26,000 ÷ 40,000) ...                 65%

            Street's earnings for diluted EPS (above) .................        $188,000

            Porter's ownership percentage....................................                 65%

            Earnings attributed to Porter company .....................        $122,200

      Porter’s earnings and shares for diluted EPS:

      Porter's separate income ...............................................        $211,000

      Street’s income applicable to Porter (above)............           122,200

      Interest saved (net of tax) on assumed

                        conversion of Porter's bonds .................................             46,000

            Diluted earnings to Porter..............................................        $379,200

      Porter shares outstanding ............................................             60,000

      Additional shares from assumed bond conversion             10,000

            Diluted shares ...................................................................             70,000

     

      Consolidated income statement EPS amounts for Porter Company:

            Basic earnings per share (above)................................               $5.90                       

            Diluted earnings per share ($379,200 ÷ 70,000) .......               $5.42