Branch Manufacturing Corporation owns 80 percent of the common shares of Short R

Question

Branch Manufacturing Corporation owns 80 percent of the common shares of Short Retail Stores. The companies’ balance sheets as of December 31, 20X4, were as follows:

      Short Retail’s 8 percent preferred stock is convertible into 12,000 shares of common stock, and its 10 percent bonds are convertible into 8,000 shares of common stock. Short reported net income of $49,200 for 20X4 and paid dividends of $30,000.

     Branch Manufacturing has 11 percent preferred stock and 12 percent bonds outstanding, neither of which is convertible. Branch reported after-tax income, excluding investment income from Short, of $100,000 in 20X4 and paid dividends of $60,000. The companies file separate tax returns and are subject to a 40 percent income tax..

Compute basic and diluted EPS for the consolidated entity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Branch Manufacturing Corporation owns 80 percent of the common shares of Short Retail Stores. The companies’ balance sheets as of December 31, 20X4, were as follows:

Explanation / Answer

Basic earnings per share:

Basic earnings per share = Total consolidated net income – Total dividends on preferred stock/Number of outstanding common stock shares before any conversion or new issues

= ($49,200 + $100,000) - ($8,000 + $22.000)/ (20,000 + 15,000 shares)

= $149,200 - $30,000/35,000 shares

= $119,200/35,000 shares

= $3.41 per share

Therefore, the basic earnings per share is $3.41.

Working note:

Preferred dividend = Preferred capital*Rate of dividend

Short:

= $100,000*8/100

= $8,000

Branch:

= $200,000*11/100

= $22,000

Number of shares before transactions = Common stock/Par value of Common stock

Short:

= $100,000/$5 per share

= 20,000 shares

Branch:

= $150,000/$10 per share

= 15,000 shares

Diluted earnings per share = Total consolidated net income – Total dividends on preferred stock/Number of outstanding common stock shares after conversion or new issues

= $149,200 - $30,000/40,000 + 15,000 shares

= $119,200/55,000 shares

= $2.17

Therefore, the diluted earnings per share is %2.17

Working note:

Number of outstanding common stock shares after conversion or new issues:

Short:

Common stock shares before conversion = 20,000 shares

Add: Conversion of preferred stock = 12,000 shares

Add: Conversion of bonds = 8,000 shares

Total outstanding common stock shares = 40,000 shares

Branch:

No conversion.

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