Question

Primus, Inc., owns all outstanding stock of Sonston, Inc. For the current year, Primus reports net income (exclusive of any investment income) of $608,000. Primus has 50,000 shares of common stock outstanding. Sonston reports net income of $208,000 for the period with 40,000 shares of common stock outstanding. Sonston also has 5,000 stock warrants outstanding that allow the holder to acquire shares at $7.50 per share. The value of this stock was $15 per share throughout the year. Primus owns 1,200 of these warrants.

What amount should Primus report for diluted earnings per share?

Answer 1

Ans: Diluted earnings per share

Particulars	Amount($)
Net income from Primus	608,000
Add: Income from sonston **	199,680
Earnings applicable to diliuted	807,680
Outstanding common shares	50,000
Diluted EPS (807,680/50,000)	$16.1536

Number of shares from conversion of stock warrants= Stock warrants outstanding * Acquired share price/ Fair value of share

= 5,000*7.50/15

= 2,500 Shares

Percentage of warrants owned by Prime = Number of warrants of P /Total Number of warrants

= 1,200/ 5000

=24 %

Total shares hold by Sonston after conversion:

Particulars	Shares
Shares outstanding	40,000
Add: assumed conversion of stock warrants	5000
Less: repurchased treasury stock (5,000-2500)	2500
Total number of shares for diluted earnings	42,500

Shares hold by Primus after conversion:

Particulars	Amount($)
Shares outstanding	40,000
Add: P shares from warrants(2500*24%)	600
Total shares hold BY Primus	40,600

Percentage of P ownership in sonston:

Percentage of P holding in S : Total shares held by P/ Total shares outstanding of Sonston

: 40,600/42,500

:96% (rounded off)

Primus shares drom S income= 208,000 *96%

=$199,680