Porter Corporation owns all 26,000 shares of the common stock of Street, Inc. Po
ID: 2414562 • Letter: P
Question
Porter Corporation owns all 26,000 shares of the common stock of Street, Inc. Porter has 60,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $211,000 while Street reports $161,000. Annual amortization of $18,000 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 $46,000 for Porter and $45,000 for Street. Porter’s bonds can be converted into 10,000 shares of common stock; Street’s bonds can be converted into 14,000 shares. Porter owns none of these bonds.
Basic EPS: 5.90
What are the DILUTED earnings per share amounts that Porter should report in its current year consolidated income statement? (Round your answers to 2 decimal places.)
Explanation / Answer
Basic EPS—Porter Company:
Porter's reported income ............................................... $211,000
Street's reported income ............................................... 161,000
Amortization expense ..................................................... (18,000)
Consolidated net income (all to Porter)................ $354,000
Porter shares outstanding ...................................... 60,000
Basic earnings per share ($354,000 ÷ 60,000) .......... $5.90
Diluted EPS—Street Company
Street earnings after amortization................................ $143,000
Shares outstanding ......................................................... 26,000
Basic earnings per share (143,000 ÷ 26,000) ............ $5.50
Street's earnings assuming conversion of its bonds
($143,000 + $45,000 interest saved net of tax) .... $188,000
Street's shares assuming conversion of its bonds
(26,000 + 14,000) ......................................................... 40,000
Diluted earnings per share (188,000 ÷ 40,000) ......... $4.70
Because diluted earnings per share is less than basic earnings per share, the convertible bonds are dilutive and should be included.
Porter’s share of Street’s diluted earnings:
Total shares assuming Street bond conversion ..... 40,000
Shares owned by Porter................................................. 26,000
Porter's ownership percentage (26,000 ÷ 40,000) ... 65%
Street's earnings for diluted EPS (above) ................. $188,000
Porter's ownership percentage.................................... 65%
Earnings attributed to Porter company ..................... $122,200
Porter’s earnings and shares for diluted EPS:
Porter's separate income ............................................... $211,000
Street’s income applicable to Porter (above)............ 122,200
Interest saved (net of tax) on assumed
conversion of Porter's bonds ................................. 46,000
Diluted earnings to Porter.............................................. $379,200
Porter shares outstanding ............................................ 60,000
Additional shares from assumed bond conversion 10,000
Diluted shares ................................................................... 70,000
Consolidated income statement EPS amounts for Porter Company:
Basic earnings per share (above)................................ $5.90
Diluted earnings per share ($379,200 ÷ 70,000) ....... $5.42