Required information Knight Co. owned 80% of the common stock of Stoop Co. Stoop

Question

Required information 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 $2 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 $2,000. Knight did not own any of Stoop's bonds. There are no excess amortizations or intra- entity transactions associated with this consolidation. Stoop reported net income of $300,000 for 2018. Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2018. What would Knight Co. report as consolidated basic earnings per share (rounded)? Multiple Choice $6.37 $6.40 $7.00 O $5.68

Explanation / Answer

STEP 1= CALCULATION OF SHARE OF KNIGHT CO. Net income of Stoop = 300000 Less : Preference Dividend = 4000 (2000 pref Share X $ 2 per shares) Net income available to Equity holders = 296000 Knight Co. share (80% X 296,000)= $      2,36,800.00 CALCULATION OF BASIC EARNING PER SHARES OF KNIGHT CO. Net Income of Knight Co. = $      4,00,000.00 Add: Share of Stoop Co. $      2,36,800.00 Total Earning available for Shareholder (A) $      6,36,800.00 No. of Shares Outstanding(B) 100000 Basic Earning per shares = Total Earning available to Shareholders / No. of Shares = A/ B $                     6.37 Answer = Option 1 = $ 6.37

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