Question

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

	Burks				Foreman
Revenues	$	(438,000	)		$	(338,000	)
Expenses		270,000				244,000
Gain on sale of equipment		0				(34,000	)
Equity earnings of subsidiary		(68,000	)			0
Net income	$	(236,000	)		$	(128,000	)
Outstanding common shares		65,000				40,000

Additional Information

Amortization expense resulting from Foreman’s excess acquisition-date fair value is $41,000 per year.

Burks has convertible preferred stock outstanding. Each of these 10,000 shares is paid a dividend of $4 per year. Each share can be converted into four shares of common stock.

Stock warrants to buy 10,000 shares of Foreman are also outstanding. For $12, each warrant can be converted into a share of Foreman’s common stock. The fair value of this stock is $20 throughout the year. Burks owns none of these warrants.

Foreman has convertible bonds payable that paid interest of $49,000 (after taxes) during the year. These bonds can be exchanged for 25,000 shares of common stock. Burks holds 10 percent of these bonds, which it bought at book value directly from Foreman.

Compute basic and diluted EPS for Burks Company.

Earnings Per Share

Basic:

Diluted:

Answer 1

Compute basic and diluted EPS for Burks Company.
Basic EPS—Parent Company (Burks)
Reported net income (separate)—Burks ($438,000 - 270,000)	$168,000.00
Foreman net income: 80% × ($128,000 – $41,000 amort.)	$69,600.00
Preferred stock dividends (10,000 × $4)	-$40,000.00
Burks’ earnings applicable to basic EPS	$197,600.00
Burks' outstanding shares	$65,000.00
Basic earnings per share ($197,600 ÷ 65,000)	$3.04
Earnings applicable to Burks’ diluted EPS:
Reported net income (separate)—Burks ($438,000 - 270,000)	$168,000.00
Burks’ share of Foreman income (Calculated Below)	$63,272.73
Preferred stock dividends (assumed conversion)	$0.00
Earnings applicable to diluted EPS	$231,272.73
Burks' outstanding shares	$65,000.00
Conversion of preferred stock into Common Stock (10,000 × 4)	$40,000.00
Shares applicable to diluted EPS	$105,000.00
Diluted earnings per share ($231,272.73 ÷ 105,000)	$2.20
Burks’ share of Foreman income
Subsidiary income for Burks’ EPS:
Net income after amortization ($128,000 – 41,000)	$87,000.00
Portion owned by parent (32,000 ÷ 44,000) (calculated below)	72.73%
Subsidiary income applicable to parent—diluted EPS	$63,272.73
Shares outstanding	40000.00
Assumed conversion of warrants	10000.00
Assumed acquisition of treasury stock withproceeds of conversion [(10,000 × $12) ÷ $20]	-6000.00
Shares applicable to diluted EPS	44,000.00
Shares controlled by parent (40,000 x 80%)	32000.00