IPA Corporation owns all 45,000 shares of the common stock of Stout, Inc. IPA ha

Question

IPA Corporation owns all 45,000 shares of the common stock of Stout, Inc. IPA has 80,000 shares of its own common stock outstanding. During the current year (2016), IPA earns income (without any consideration of its investment in Stout) of $300,000 while Stout reports $260,000. Annual amortization of $15,000 is recognized each year on the consolidation worksheet based on acquisition-date fair-value allocations. Both firms, IPA and Stout, have convertible bonds outstanding. During the current year, bond-related interest expense (net of taxes) is $16,000 for IPA and $18,000 Stout. IPA’s bonds can be converted into 12,000 shares of common stock. Stout’s bonds can be converted into 5,000 shares of common stock. IPA owns none of these bonds. What are the earnings per share amounts that IPA should report in its current year consolidated income statement?

Explanation / Answer

Assuming there is no intercompany   holding of converible bonds, there is no requirement for eliminating interest expense on bond Consolidated Income IPA Year 2016 Details Amt $ Net Income IPA          300,000 Add : Income from Stout          260,000 Less: Fair Value consolidation amortization          (15,000) Net Consolidated Income IPA          545,000 Outstanding Common Stock IPA            80,000 Earning Per Share IPA $            6.81 ( As the Tax rate not given , the diluted EPS cannot be calculated as the bond ineterst realted change with tax effect needs to be worked out)

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