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 $528,000. Primus has 50,000 shares of common stock outstanding. Sonston reports net income of $128,000 for the period with 40,000 shares of common stock outstanding. Sonston also has 5,000 stock warrants outstanding that allow the holder to acquire shares at $14.00 per share. The value of this stock was $28 per share throughout the year. Primus owns 2,100 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

Computation of Total Shares for Sonston's Diluted earnings

Total Shares of Sonston controlled by Primus = 40,000 + [( 2,100 / 5,000) * 2,500] = 41,050 shares

Percentage of Shares of Sonston controlled by Primus = 41,050 / 42,500 = 97 %

Income of Sonston to be included in Primus’s Diluted EPS = $128,000 * 97 % = $124,160

Computation of diluted earning per share for Primus Inc

Details Number of Shares Total number of shares outstanding 40,000 stock warrants (assumed conversion) 5,000 Repurchase of treasury stock with proceeds of stock warrants : 5,000 * $14 / $28 (2,500) 2,500 Total Shares for Sonston's Diluted earnings 42,500

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