Branch Manufacturing Corporation owns 80 percent of the common shares of Short R
ID: 2500918 • Letter: B
Question
Branch Manufacturing Corporation owns 80 percent of the common shares of Short Retail Stores. The companies’ balance sheets as of December 31, 20X4, were as follows:
Short Retail’s 8 percent preferred stock is convertible into 12,000 shares of common stock, and its 10 percent bonds are convertible into 8,000 shares of common stock. Short reported net income of $49,200 for 20X4 and paid dividends of $30,000.
Branch Manufacturing has 11 percent preferred stock and 12 percent bonds outstanding, neither of which is convertible. Branch reported after-tax income, excluding investment income from Short, of $100,000 in 20X4 and paid dividends of $60,000. The companies file separate tax returns and are subject to a 40 percent income tax..
Compute basic and diluted EPS for the consolidated entity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Branch Manufacturing Corporation owns 80 percent of the common shares of Short Retail Stores. The companies’ balance sheets as of December 31, 20X4, were as follows:
Explanation / Answer
Basic earnings per share:
Basic earnings per share = Total consolidated net income – Total dividends on preferred stock/Number of outstanding common stock shares before any conversion or new issues
= ($49,200 + $100,000) - ($8,000 + $22.000)/ (20,000 + 15,000 shares)
= $149,200 - $30,000/35,000 shares
= $119,200/35,000 shares
= $3.41 per share
Therefore, the basic earnings per share is $3.41.
Working note:
Preferred dividend = Preferred capital*Rate of dividend
Short:
= $100,000*8/100
= $8,000
Branch:
= $200,000*11/100
= $22,000
Number of shares before transactions = Common stock/Par value of Common stock
Short:
= $100,000/$5 per share
= 20,000 shares
Branch:
= $150,000/$10 per share
= 15,000 shares
Diluted earnings per share = Total consolidated net income – Total dividends on preferred stock/Number of outstanding common stock shares after conversion or new issues
= $149,200 - $30,000/40,000 + 15,000 shares
= $119,200/55,000 shares
= $2.17
Therefore, the diluted earnings per share is %2.17
Working note:
Number of outstanding common stock shares after conversion or new issues:
Short:
Common stock shares before conversion = 20,000 shares
Add: Conversion of preferred stock = 12,000 shares
Add: Conversion of bonds = 8,000 shares
Total outstanding common stock shares = 40,000 shares
Branch:
No conversion.