Following are separate income statements for Austin, Inc., and its 90 percent ow
ID: 2553777 • Letter: F
Question
Following are separate income statements for Austin, Inc., and its 90 percent owned subsidiary, Rio Grande Corporation as well as a consolidated statement for the business combination as a whole.
Additional Information:
Annual excess fair over book value amortization of $46,000 resulted from the acquisition.
The parent applies the equity method to this investment.
Austin has 50,000 shares of common stock and 13,000 shares of preferred stock outstanding. Owners of the preferred stock are paid an annual dividend of $50,000, and each share can be exchanged for two shares of common stock.
Rio Grande has 50,000 shares of common stock outstanding. The company also has 5,000 stock warrants outstanding. For $10, each warrant can be converted into a share of Rio Grande’s common stock. Austin holds half of these warrants. The price of Rio Grande’s common stock was $20 per share throughout the year.
Rio Grande also has convertible bonds, none of which Austin owned. During the current year, total interest expense (net of taxes) was $43,000. These bonds can be exchanged for 10,000 shares of the subsidiary’s common stock.
Determine Austin’s basic and diluted EPS. (Round your final answers to 2 decimal places.)
Austin Rio Grande Consolidated Revenues $ (763,000 ) $ (542,000 ) $ (1,305,000 ) Cost of goods sold 421,000 321,000 742,000 Operating expenses 121,000 67,000 216,000 Equity in earnings of Rio Grande (105,000 ) Individual company net income $ (326,000 ) $ (154,000 ) Consolidated net income $ (347,000 ) Noncontrolling interest in consolidated net income (21,000 ) Consolidated net income attributable to Austin $ (326,000 )Explanation / Answer
a. Basic EPS:
Earnings = Consolidated net income attributable to Austin - Preferred Dividend
= 326000 - 50,000
= 276,000
No of shares of common stock = 50,000
Basic EPS=Earnings / No of shares of common stock
= 276,000, /50,000
= 5.52
b) Diluted EPS:
Percentage of holding by Austin in Rio Granade -
Share of Austin in Rio Grande's earnings:
Diluted Earnings of Austin:
Diluted Shares of Austin:
Diluted EPS = Diluted Earnings/Diluted EPS
= 332740/76000
=4.38
Shares Outstanding 50000 Stock warrants assumed to be converted 5000 Assumed conversion of the stock warrants into common stock[5000*10]/20 -2500 Assumed conversion of bonds 10000 Total shares for diluted EPS 62500 Austin Holds 90% of 50000 45000 1/2 of Stock Warrants 1250 Total shares held by Austin 46250 % of shareholding
[46250/62500] 74%