Question
In: Accounting
Porter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 65,000...
Porter Corporation owns all 30,000 shares of the common stock of Street, Inc. Porter has 65,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $253,000 while Street reports $201,000. Annual amortization of $12,000 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 $55,000 for Porter and $51,000 for Street. Porter’s bonds can be converted into 8,000 shares of common stock; Street’s bonds can be converted into 10,000 shares. Porter owns none of these bonds.
What are the earnings per share amounts that Porter should report in its current year consolidated income statement? (Round your answers to 2 decimal places.)
Basic EPS:
Diluted EPS:
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Expert Solution
Answer :
Basic EPS = $ 6.8
Diluted EPS = $ 6.68
Working :
Computation of basic EPS
| Particular | Amount($) |
| Porter's reported Income | 253000 |
| Street's reported Income | 201000 |
| Amortization expense | -12000 |
| Consolidated Net Income (A) | 442000 |
| Porter's shares outstanding (B) | 65000 |
| Basic earning per share (A/B) | 6.8 |
Computation of diluated EPS Street company
| Particular | Amount($) |
| Street's Reported Income | 201000 |
| less : Amortization expense | -12000 |
| Income after amortization | 189000 |
| Shares outstanding in street | 30000 |
| Basic EPS (189000 / 30000 ) | 6.3 |
Street's earning assuming conersion of its bonds : 189000 + 51000 ( Interest saving after tax )
= 240000
Street share assuming conversion of its bond : 30000 + 10000
= 40000
Diluted EPS = 240000 / 40000
= $ 6
Since diluted EPS ( $ 6 ) is less than basic EPS ( 6.3 ) the convertible bonds are dilutive therefore should be included
Porter's share in street's diluted earnings -
| Total shares assuming bond conversion | 40000 |
| Shares held by porter | 30000 |
| Porter's ownership percent | 75% |
| Street's earnings for diluted EPS | 240000 |
| Porter's ownership share ( 240000 * 75% ) | 180000 |
Porter's earning and number of shares for diluted EPS :
| Porter's reported income | 253000 |
| Porter's income in street | 180000 |
| Interest saved after tax ( assumed conversion) | 55000 |
| Porter's diluted earnings | 4880000 |
| Porter's outstanding shares | 65000 |
| Add : shares from assumed conversion | 8000 |
| Diluted shares | 73000 |
| Diluted earning per share ( 488000 / 73000 ) | 6.68 |
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