Question

Following are separate income statements for Austin, Inc., and its 70 percent owned subsidiary, Rio Grande Corporation as well as a consolidated statement for the business combination as a whole.

	Austin				Rio Grande				Consolidated
Revenues	$	(733,000	)		$	(522,000	)		$	(1,255,000	)
Cost of goods sold		411,000				311,000				722,000
Operating expenses		107,000				81,000				206,000
Equity in earnings of Rio Grande		(95,000	)
Individual company net income	$	(310,000	)		$	(130,000	)
Consolidated net income									$	(327,000	)
Noncontrolling interest in consolidated net income										(17,000	)
Consolidated net income attributable to Austin									$	(310,000	)

Additional Information

Annual excess fair over book value amortization of $36,000 resulted from the acquisition.

The parent applies the equity method to this investment.

Austin has 60,000 shares of common stock and 6,000 shares of preferred stock outstanding. Owners of the preferred stock are paid an annual dividend of $40,000, and each share can be exchanged for four shares of common stock.

Rio Grande has 42,000 shares of common stock outstanding. The company also has 10,000 stock warrants outstanding. For $10, each warrant can be converted into a share of Rio Grande’s common stock. Austin holds half of these warrants. The price of Rio Grande’s common stock was $20 per share throughout the year.

Rio Grande also has convertible bonds, none of which Austin owned. During the current year, total interest expense (net of taxes) was $33,000. These bonds can be exchanged for 11,000 shares of the subsidiary’s common stock.

Determine Austin's basic and diluted EPS

Answer 1

Basic EPS:

Austin, Inc. Consolidated net income to Parent $310,000

Less: Austin’s preferred dividend ($40,000)

Earnings available to Austin’s basic EPS $270,000

Austin’s outstanding common shares 60,000 shares

Basic EPS ($270,000 / 60,000 shares) = $4.5 per share

Diluted EPS:

Austin’s outstanding common shares 60,000 shares

Total number of preference shares = 6,000 shares, each of these shares can be exchanged for four share of common stock.

Therefore on conversion equivalent number of common stock shares = 6,000 shares * 4 = 24,000 common stock shares

Hence, total common stock shares = 60,000 + 24,000 = 84,000 shares

Austin, Inc. Consolidated net income to Parent $310,000

This time, we will not be deducting preference dividend out of this income of $310,000, since we are assuming that all the preference shares holders have got converted their preference shares to the equivalent number of common stock of the company.

Diluted EPS ($310,000 / 84,000 shares) = $3.69 per share