The following separate income statements are for Burks Company and its 80 percen
ID: 2517774 • Letter: T
Question
The following separate income statements are for Burks Company and its 80 percent–owned subsidiary, Foreman Company: Burks Foreman Revenues $ (438,000 ) $ (338,000 ) Expenses 270,000 244,000 Gain on sale of equipment 0 (34,000 ) Equity earnings of subsidiary (68,000 ) 0 Net income $ (236,000 ) $ (128,000 ) Outstanding common shares 65,000 40,000 Additional Information •Amortization expense resulting from Foreman’s excess acquisition-date fair value is $41,000 per year. •Burks has convertible preferred stock outstanding. Each of these 10,000 shares is paid a dividend of $4 per year. Each share can be converted into four shares of common stock. •Stock warrants to buy 10,000 shares of Foreman are also outstanding. For $12, each warrant can be converted into a share of Foreman’s common stock. The fair value of this stock is $20 throughout the year. Burks owns none of these warrants. •Foreman has convertible bonds payable that paid interest of $49,000 (after taxes) during the year. These bonds can be exchanged for 25,000 shares of common stock. Burks holds 10 percent of these bonds, which it bought at book value directly from Foreman. Compute basic and diluted EPS for Burks Company. The following separate income statements are for Burks Company and its 80 percent–owned subsidiary, Foreman Company: Burks Foreman Revenues $ (438,000 ) $ (338,000 ) Expenses 270,000 244,000 Gain on sale of equipment 0 (34,000 ) Equity earnings of subsidiary (68,000 ) 0 Net income $ (236,000 ) $ (128,000 ) Outstanding common shares 65,000 40,000 Additional Information •Amortization expense resulting from Foreman’s excess acquisition-date fair value is $41,000 per year. •Burks has convertible preferred stock outstanding. Each of these 10,000 shares is paid a dividend of $4 per year. Each share can be converted into four shares of common stock. •Stock warrants to buy 10,000 shares of Foreman are also outstanding. For $12, each warrant can be converted into a share of Foreman’s common stock. The fair value of this stock is $20 throughout the year. Burks owns none of these warrants. •Foreman has convertible bonds payable that paid interest of $49,000 (after taxes) during the year. These bonds can be exchanged for 25,000 shares of common stock. Burks holds 10 percent of these bonds, which it bought at book value directly from Foreman. Compute basic and diluted EPS for Burks Company.
The following separate income statements are for Burks Company and its 80 percent–owned subsidiary, Foreman Company:
Additional Information
Amortization expense resulting from Foreman’s excess acquisition-date fair value is $41,000 per year.
Burks has convertible preferred stock outstanding. Each of these 10,000 shares is paid a dividend of $4 per year. Each share can be converted into four shares of common stock.
Stock warrants to buy 10,000 shares of Foreman are also outstanding. For $12, each warrant can be converted into a share of Foreman’s common stock. The fair value of this stock is $20 throughout the year. Burks owns none of these warrants.
Foreman has convertible bonds payable that paid interest of $49,000 (after taxes) during the year. These bonds can be exchanged for 25,000 shares of common stock. Burks holds 10 percent of these bonds, which it bought at book value directly from Foreman.
Compute basic and diluted EPS for Burks Company.
Burks Foreman Revenues $ (438,000 ) $ (338,000 ) Expenses 270,000 244,000 Gain on sale of equipment 0 (34,000 ) Equity earnings of subsidiary (68,000 ) 0 Net income $ (236,000 ) $ (128,000 ) Outstanding common shares 65,000 40,000Explanation / Answer
Calculation of Basic EPS & Diluted EPS.
Basic EPS—Parent Company (Burks):
Reported net income (separate)—Burks $150,000
Foreman net income: 80% × ($120,000 – $40,000 ) $64,000
Preferred stock dividends (8,000 × $4) $ (32,000)
Burks’ earnings applicable to basic EPS $182,000
Burks' outstanding shares 65,000
Basic earnings per share ($182,000 ÷ 65,000) $ 2.80
Diluted EPS—Parent Company (Burks)#
Subsidiary income for Burks’ EPS:
Net income after amortization ($120,000 – 40,000) $80,000
Shares outstanding 40,000
Assumed conversion of warrants 20,000
Assumed acquisition of treasury stock with proceeds of
Conversion [(20,000 × $15) ÷ $20] (15,000)
Shares applicable to diluted EPS 45,000
Shares controlled by parent :( 40,000 × 80%) 32,000
Income used in diluted EPS computation $80,000
Portion owned by parent (32,000 ÷ 45,000) 71.11%
Subsidiary income applicable to parent—diluted EPS $56,889
Earnings applicable to Burks’ diluted EPS
Reported net income (separate)—Burks $150,000
Burks’ share of Foreman income (above) 56,889
Because of assumed conversion, preferred stock 0
dividends would not be paid
-
Earnings applicable to diluted EPS $206,889
Burks' outstanding shares 65,000
Assumed conversion of preferred stock (8,000 × 4) 32,000
Shares applicable to diluted EPS 97,000
Diluted earnings per share ($206,889 ÷ 97,000) = $ 2.13
#Foreman’s convertible bonds are antidilutive and thus excluded from the diluted EPS calculations.