Please show the steps to get to the answer. Knight Co. owned 80% of the common s
ID: 2587912 • Letter: P
Question
Please show the steps to get to the answer.
Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2011.
13. Stoop's diluted earnings per share (rounded) is calculated to be
A. $5.62.
B. $3.26.
C. $3.11.
D. $5.03.
E. $4.28.
Explanation / Answer
In order to calculate Stoop's diluted earning per share it is required to fiirst calculate Stop's earnings that should be included in calculating diluted earning per share.
% of parent share= parent shares / Total shares*
= 40,000 / 64,000 * 100
= 62.5%
* Total shares= 50,000 + 8,000(convertible preferred stock) + 6,000 (convertible bonds into shares)
= 64000
Amount of earnings to be included in calculating diluted EPS= Total earnings * % of parent shares
= ($300,000 + $22,000(interest on bonds)) * 62.5%
= $201,250
Consolidated Diluted Earning per share = Amount of earnings / Diluted shares
= $201,250 / (50,000* 80%)
= $201,250 / 40,000
= $5.03