Question

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 $232,000 while Street reports $186,000. Annual amortization of $15,000 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 $49,000 for Porter and $41,000 for Street. Porter’s bonds can be converted into 9,000 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.)

Answer 1

Answer:

Calculation of Basic EPS

Street is 100% subsidiary of porter So porter can report all earnings of street Inc in his Income Statement.

Porters Net Income	232000
Add: Streets Net Income	186000
Less: Annual Amortization expenses	15000
	403000
No of Equity shares	65000
Basic EPS = 403000/65000	6.20/ share

Now DIluted EPS

First we have to make calculation for street Inc
street has bonds which can be converted in 10000 eq shares
then total no of shares will be = 30000+10000 = 40000
Then porters stake will reduce to 30000/40000 * 100 = 75%

So now porters will report only 75% of Income in Statements

Streets Net Income	186000
Add: Interest Saved (as bonds are converted in stock)	41000
	227000

Now porters stake is 75%
So he will report = 75% (227000) = 170250 in statement

Now porters Inc has also bonds which will be converted into 9000 stock

So total stock = 65000+9000 = 74000

Porers Net Income	232000
Add: Streets Net Income (75%)	170250
Less: Amortization expenses (75%)	11250
Add: Interest saved on Bonds (as they are converted in stock)	49000
	440000
Diluted EPS = 440000/74000	5.946 per share