Question

Porter Corporation owns all 28,000 shares of the common stock of Street, Inc. Porter has 58,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $209,000 while Street reports $181,000. Annual amortization of $13,000 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 $41,000 for Porter and $21,000 for Street. Porter’s bonds can be converted into 5,000 shares of common stock; Street’s bonds can be converted into 7,000 shares. Porter owns none of these bonds.

1. What are the basic earnings per share amounts that Porter should report in its current year consolidated income statement? (Round your answers to 2 decimal places.)

2. What are the diluted earnings per share? (Round your answers to 2 decimal places.)

Answer 1

Solution:

Portex corporation income	$28,000
Portex outstanding shares	$58,000
Poetex reported income	$209,000
Street reported income	$181,000
Annual amortization	$13,000

Basic earning per share

Particulars	Amount
Portex reported income	$209,000
Street reported income	$181,000
Less: Amortization expect	$13,000
P's net consolidated income(a)	$403,000
P's outstanding shares(b)	$58,000
Consolidated basic eaining per share(a/b)	$6.95

2)

Diluted earnings

Consolidate diluted earnings per share P's diluted income(W.N1)	$250,000
Add: P's share in S Diluted income(wn2)	$172,000
Consolidated diluted earnings(a)	$422,000
P's diluted shares(wn3)(b)	$63,000
Consolidated diluted earnings (a/b)	$6.70

Working note 1:

Calculate P's Diluted income

Particulars	Amount
Reported income	$209,000
Add: savings in interest on bounds (net of tax)	$41,000
Diluted income	$250,000

calculate P's share in S's siluted income:

Particulars	Amount
Reported income	$181,000
Less: Amortization expenses	$13,000
Add: Savings interest	$21,000
Diluted income(a)	$215,000

P's share = share held by P in S / Diluted shares of s (Wn3)

=28,000/35,000(b)

(b)=80%

P's share in S's diluted income (a*b)=215,000*80%

=$172,000