Compute consolidated EPS; subsidiary diluted
Pin Company owns 40,000 of 50,000 outstanding shares of Sum Company, and during 2011, it recognizes income from Sum as follows:
|
Share of Sum net income ($500,000 * 80%) |
$ 400,000 |
|
Patent amortization |
(50,000) |
|
Unrealized profit—downstream sales |
(40,000) |
|
Unrealized profit—upstream sales ($60,000 * 80%) |
(48,000 ) |
|
Income from Sum |
$262,000 |
Pin’s net income for 2011 is $1,262,000, consisting of separate income from Pin of $1,000,000 and $262,000 income from Sum. Pin has 100,000 shares of common stock outstanding, but no common stock equivalents or other potentially dilutive securities.
Sum has $100,000 par of 10 percent convertible bonds outstanding that are convertible into 10,000 shares of Sum common stock. The net of tax interest on the bonds is $6,400, and Sum’s diluted earnings per share for purposes of computing consolidated earnings per share are determined as follows:
|
Net income |
$500,000 |
|
Add: Net of tax interest on convertible bonds |
6,400 |
|
Less: Unrealized profit on upstream sales |
(60,000 ) |
|
a Diluted earnings |
$446,400 |
|
Common shares outstanding |
50,000 |
|
Shares issuable upon conversion of bonds |
10,000 |
|
b Common shares and equivalents |
60,000 |
|
Diluted earnings per share (a , b) |
$ 7.44 |
REQUIRED: Compute Pin Company’s and consolidated diluted earnings per share for 2011.