Question

Following are separate income statements for Austin, Inc., and its 90 percent owned subsidiary, Rio Grande Corporation as well as a consolidated statement for the business combination as a whole.

	Austin				Rio Grande				Consolidated
Revenues	$	(763,000	)		$	(542,000	)		$	(1,305,000	)
Cost of goods sold		421,000				321,000				742,000
Operating expenses		121,000				67,000				216,000
Equity in earnings of Rio Grande		(105,000	)
Individual company net income	$	(326,000	)		$	(154,000	)
Consolidated net income									$	(347,000	)
Noncontrolling interest in consolidated net income										(21,000	)
Consolidated net income attributable to Austin									$	(326,000	)

Additional Information:

Annual excess fair over book value amortization of $46,000 resulted from the acquisition.

The parent applies the equity method to this investment.

Austin has 50,000 shares of common stock and 13,000 shares of preferred stock outstanding. Owners of the preferred stock are paid an annual dividend of $50,000, and each share can be exchanged for two shares of common stock.

Rio Grande has 50,000 shares of common stock outstanding. The company also has 5,000 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 $43,000. These bonds can be exchanged for 10,000 shares of the subsidiary’s common stock.

Determine Austin’s basic and diluted EPS. (Round your final answers to 2 decimal places.)

Answer 1

a. Basic EPS:

Earnings = Consolidated net income attributable to Austin - Preferred Dividend

= 326000 - 50,000

= 276,000

No of shares of common stock = 50,000

Basic  EPS=Earnings / No of shares of common stock

= 276,000, /50,000

= 5.52

b) Diluted EPS:

Percentage of holding by Austin in Rio Granade -

Shares Outstanding	50000
Stock warrants assumed to be converted	5000
Assumed conversion of the stock warrants into common stock [5000*10]/20	-2500
Assumed conversion of bonds	10000
Total shares for diluted EPS	62500
Austin Holds 90% of 50000	45000
1/2 of Stock Warrants	1250
Total shares held by Austin	46250
% of shareholding [46250/62500]	74%

Share of Austin in Rio Grande's earnings:

Income after amortization [154000-46000]	108000
Add: Interest savings post conversion of bonds	43000
Total	151000
Austins share (74%)	111740

Diluted Earnings of Austin:

Individual Net Income [326000-105000]	221000
Share in Rio Granade	111740
Total	332740

Diluted Shares of Austin:

Common Stock	50000
Conversion of preferred Stock [13000*2]	26000
Total	76000

Diluted EPS = Diluted Earnings/Diluted EPS

= 332740/76000

=4.38