Earnings per Share with Convertible Securities
Branch Manufacturing Corporation owns 80 percent of the common shares of Short Retail Stores. The companies’ balance sheets as of December 31, 20X4, were as follows:
| Branch Manufacturing | Short |
| Corporation | Retail Stores |
Cash | $ 50,000 | $ 30,000 |
Accounts Receivable | 100,000 | 80,000 |
Inventory | 260,000 | 120,000 |
Land | 90,000 | 60,000 |
Buildings and Equipment | 500,000 | 300,000 |
Less: Accumulated Depreciation | (220,000) | (120,000) |
Investment in Short Retail Stores Stock | 120,000 |
|
Total Assets | $900,000 | $470,000 |
Accounts Payable | $ 40,000 | $ 20,000 |
Bonds Payable | 300,000 | 200,000 |
Preferred Stock ($10 par value) | 200,000 | 100,000 |
Common Stock: |
|
|
$10 par value | 150,000 |
|
$5 par value |
| 100,000 |
Retained Earnings | 210,000 | 50,000 |
Total Liabilities and Equity | $900,000 | $470,000 |
The 8 percent preferred stock of Short Retail is convertible into 12,000 shares of common stock, and Short’s 10 percent bonds are convertible into 8,000 shares of common stock. Short Retail reported net income of $49,200 for 20X4 and paid dividends of $30,000.
Branch Manufacturing has 11 percent preferred stock and 12 percent bonds outstanding, neither of which is convertible. Branch Manufacturing reported after-tax income, excluding investment income from Short Retail, of $100,000 in 20X4 and paid dividends of $60,000. The companies file separate tax returns and are subject to a 40 percent income tax.
Required
Compute basic and diluted earnings per share for the consolidated entity.
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