Primus, Inc., owns all outstanding stock of Sonston, Inc. For the current year,

Question

Primus, Inc., owns all outstanding stock of Sonston, Inc. For the current year, Primus reports net income (exclusive of any investment income) of $624,000. Primus has 50,000 shares of common stock outstanding. Sonston reports net income of $224,000 for the period with 50,000 shares of common stock outstanding. Sonston also has 10,000 stock warrants outstanding that allow the holder to acquire shares at $7.50 per share. The value of this stock was $15 per share throughout the year. Primus owns 4,500 of these warrants. What amount should Primus report for diluted earnings per share? (Round your intermediate percentage value to the nearest whole number and the final answer to 2 decimal places.) Diluted earnings per share

Explanation / Answer

Net Income $ 2,24,000

Shares outstanding . 50,000

Assumed conversion of stock warrants . 10,000

Repurchase of treasury stock with proceeds

of stock Warrants (10,000 × 7.5/15)                    . (5 ,000 ) 5,000

Shares for diluted earnings per share computation. .... 55,000

Shares controlled by Primus: 50,000 + (20% of 5,000) 51,000

Percentage of total held by Primus: 51,000 ÷ 55,000 93%

Income to be included in parent’s diluted EPS ($ 224000 × 93%) $ 208320

Parent’s Diluted Earnings Per Share:

Net income – Primus .                                                                       $ 624000

Net income included from Sonston                                                   $ 208320

Earnings for diluted EPS $ 832320

Outstanding shares of Primus . (10000*7.5) 75000

PARENT’S DILUTED EARNINGS PER SHARE = $ 832320 ÷ 75000 = $ 11.10 / Share  

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