Question

E10-16 Effect of Convertible Preferred Stock on Earnings per Share LO 10.4 Pagle Corporation holds 80 percent of Standard Company's common shares. The companies report the following balance sheet data for December 31, 20X1: Pagle Corporation Standard Company $ $ 58,000 86,000 128,000 740,000 (285,000) 128,000 $ 855,000 48,eee 66,000 78,000 300,000 (145,000) $ 347,000 Assets Cash Accounts Receivable Inventory Buildings and Equipment Less: Accumulated Depreciation Investment in Standard Company Stock Total Assets Liabilities and Owners' Equity Accounts Payable Taxes Payable Preferred Stock ($10 par value) Common Stock: $10 par value $5 par value Retained Earnings Total Liabilities and Owners' Equity $ 87,000 $ 209,000 76,000 200,000 100,000 100,000 270,000 $ 855,000 50,000 110,000 $ 347,000 An 8 percent annual dividend is paid on the Pagle preferred stock and a 12 percent dividend is paid on the Standard preferred stock Pagle's preferred shares are not convertible. Standard's preferred shares can be converted into 15,000 shares of common stock at any time. For 20X1, Standard reports $47,000 of net income and pays total dividends of $25,000, and Pagle reports $69,000 of income from its separate operations and pays total dividends of $41,000. Required: Compute basic and diluted EPS for the consolidated entity for 20X1. (Round your answers to 2 decimal places.) Basic earnings per share Diluted earnings per share

Answer 1

Calculations are as follows -

1 Standard Company 2 $ 100,000.00 10,000.00 15,000.00 3 Preferred Stock at $10 per share 4 No. of share of preferred stock No. of shares of preferred stock which can be converted in common 5 stock 6 7 Earnings 8 Less - Dividend on preferred stock 9 Net earnings $ 47,000.00 $ 12,000.00 $ 35,000.00 10 $ 50.000.00 5.00 10,000.00 15,000.00 25,000.00 S $ 3.50 1.40 11 Common Stock 12 Price per share 13 No. of Shares Outstanding 14 Add: Convertible Preferred Stock 15 Total Shares Outstanding 16 17 EPS 18 Diluted EPS 19 20 Pagle Corporation 21 22 Preferred Stock at $10 per share 23 No. of shares outstanding 24 25 Earnings 26 Less - Dividend on preferred stock 27 Net earnings $ 200,000.00 20,000.00 $ 69,000.00 $ 16,000.00 $ 53,000.00

B $ 28,000.00 $ 81,000.00 $ 53,000.00 $ 11,200.00 А Add: Dividend income earned from holding of 80% of Standard 28 company's common stock 29 Total Net earnings for EPS 30 31 Net earnings Add: Dividend income from 32 Standard Company's diluted EPS 33 Totan Net earnings for DEPS 34 35 Common Stock 36 Price per share 37 No. of Shares Outstanding 38 Add: Convertible Preferred Stock 39 Total Shares Outstanding 40 41 Consolidated EPS 42 Consolidated Diluted EPS $ 64,200.00 $100,000.00 10.00 10,000.00 10,000.00 S 8.10 6.42 IS

Formula used in the above table -

A 1 Standard Company 2 100000 10000 3 Preferred Stock at $10 per share 4 No. of share of preferred stock No. of shares of preferred stock which can be converted in common stock 5 15000 47000 =100000*12% =+B7-B8 50000 =+B11/B12 =+B5 =+B13+B14 7 Earnings 8 Less - Dividend on preferred stock 9 Net earnings 10 11 Common Stock 12 Price per share 13 No. of Shares Outstanding 14 Add: Convertible Preferred Stock 15 Total Shares Outstanding 16 17 EPS 18 Diluted EPS 19 20 Pagle Corporation 21 22 Preferred Stock at $10 per share 23 No. of shares outstanding 24 25 Earnings 26 Less - Dividend on preferred stock 27 Net earnings =+B9/B13 =+B9/B15 200000 20000 69000 =+B22*8% =+B25-B26

Add: Dividend income earned from holding of 80% of Standard company's common stock 28 29 Total Net earnings for EPS =+B13*80%B17 =+B27+B28 30 53000 =+B13*80%*B18 =+B31+B32 31 Net earnings Add: Dividend income from Standard Company's diluted EPS 32 33 Totan Net earnings for DEPS 34 35 Common Stock 36 Price per share 37 No. of Shares Outstanding 38 Add: Convertible Preferred Stock 39 Total Shares Outstanding 40 41 Consolidated EPS 42 Consolidated Diluted EPS 100000 10 =+B35/B36 =+B37+B38 =+B29/B39 =+B33/B39

I hope above answer will help you in your task.