Question

The following separate income statements are for Burks Company and its 80 percent–owned subsidiary, Foreman Company: Burks Foreman Revenues $ (438,000 ) $ (338,000 ) Expenses 270,000 244,000 Gain on sale of equipment 0 (34,000 ) Equity earnings of subsidiary (68,000 ) 0 Net income $ (236,000 ) $ (128,000 ) Outstanding common shares 65,000 40,000 Additional Information •Amortization expense resulting from Foreman’s excess acquisition-date fair value is $41,000 per year. •Burks has convertible preferred stock outstanding. Each of these 10,000 shares is paid a dividend of $4 per year. Each share can be converted into four shares of common stock. •Stock warrants to buy 10,000 shares of Foreman are also outstanding. For $12, each warrant can be converted into a share of Foreman’s common stock. The fair value of this stock is $20 throughout the year. Burks owns none of these warrants. •Foreman has convertible bonds payable that paid interest of $49,000 (after taxes) during the year. These bonds can be exchanged for 25,000 shares of common stock. Burks holds 10 percent of these bonds, which it bought at book value directly from Foreman. Compute basic and diluted EPS for Burks Company. The following separate income statements are for Burks Company and its 80 percent–owned subsidiary, Foreman Company: Burks Foreman Revenues $ (438,000 ) $ (338,000 ) Expenses 270,000 244,000 Gain on sale of equipment 0 (34,000 ) Equity earnings of subsidiary (68,000 ) 0 Net income $ (236,000 ) $ (128,000 ) Outstanding common shares 65,000 40,000 Additional Information •Amortization expense resulting from Foreman’s excess acquisition-date fair value is $41,000 per year. •Burks has convertible preferred stock outstanding. Each of these 10,000 shares is paid a dividend of $4 per year. Each share can be converted into four shares of common stock. •Stock warrants to buy 10,000 shares of Foreman are also outstanding. For $12, each warrant can be converted into a share of Foreman’s common stock. The fair value of this stock is $20 throughout the year. Burks owns none of these warrants. •Foreman has convertible bonds payable that paid interest of $49,000 (after taxes) during the year. These bonds can be exchanged for 25,000 shares of common stock. Burks holds 10 percent of these bonds, which it bought at book value directly from Foreman. Compute basic and diluted EPS for Burks Company.

The following separate income statements are for Burks Company and its 80 percent–owned subsidiary, Foreman Company:

	Burks				Foreman
Revenues	$	(438,000	)		$	(338,000	)
Expenses		270,000				244,000
Gain on sale of equipment		0				(34,000	)
Equity earnings of subsidiary		(68,000	)			0
Net income	$	(236,000	)		$	(128,000	)
Outstanding common shares		65,000				40,000

Additional Information

Amortization expense resulting from Foreman’s excess acquisition-date fair value is $41,000 per year.

Burks has convertible preferred stock outstanding. Each of these 10,000 shares is paid a dividend of $4 per year. Each share can be converted into four shares of common stock.

Stock warrants to buy 10,000 shares of Foreman are also outstanding. For $12, each warrant can be converted into a share of Foreman’s common stock. The fair value of this stock is $20 throughout the year. Burks owns none of these warrants.

Foreman has convertible bonds payable that paid interest of $49,000 (after taxes) during the year. These bonds can be exchanged for 25,000 shares of common stock. Burks holds 10 percent of these bonds, which it bought at book value directly from Foreman.

Compute basic and diluted EPS for Burks Company.

Earnings Per Share
Basic
Diluted

Answer 1

Calculation of Basic EPS & Diluted EPS.

Basic EPS—Parent Company (Burks):

Reported net income (separate)—Burks                              $150,000

Foreman net income: 80% × ($120,000 – $40,000 )             $64,000

Preferred stock dividends (8,000 × $4)                               $ (32,000)

Burks’ earnings applicable to basic EPS                             $182,000

Burks' outstanding shares                                                   65,000

Basic earnings per share ($182,000 ÷ 65,000)                        $ 2.80

Diluted EPS—Parent Company (Burks)#

Subsidiary income for Burks’ EPS:

Net income after amortization ($120,000 – 40,000)            $80,000

Shares outstanding                                                         40,000

Assumed conversion of warrants                                       20,000

Assumed acquisition of treasury stock with proceeds of

Conversion [(20,000 × $15) ÷ $20]                                    (15,000)

Shares applicable to diluted EPS                                       45,000

Shares controlled by parent :( 40,000 × 80%)                     32,000

Income used in diluted EPS computation                           $80,000

Portion owned by parent (32,000 ÷ 45,000)                            71.11%

Subsidiary income applicable to parent—diluted EPS         $56,889

Earnings applicable to Burks’ diluted EPS

Reported net income (separate)—Burks                              $150,000

Burks’ share of Foreman income (above)                                56,889

Because of assumed conversion, preferred stock                    0

dividends would not be paid    

                                  -

Earnings applicable to diluted EPS                                        $206,889

Burks' outstanding shares                                                       65,000

Assumed conversion of preferred stock (8,000 × 4)                    32,000

Shares applicable to diluted EPS                                               97,000

Diluted earnings per share ($206,889 ÷ 97,000) = $ 2.13

#Foreman’s convertible bonds are antidilutive and thus excluded from the diluted EPS calculations.