Question

Porter Corporation owns all 40,000 shares of the common stock of Street, Inc. Porter has 80,000 shares of its own common stock outstanding. During the current year, Porter earns net income (without any consideration of its investment in Street) of $264,000 while Street reports $236,000. Annual amortization of $12,000 is recognized each year on the consolidation worksheet based on acquisition-date fair-value allocations. Both companies have convertible bonds outstanding. During the current year, bond-related interest expense (net of taxes) is $48,000 for Porter and $36,000 for Street. Porter’s bonds can be converted into 8,000 shares of common stock; Street’s bonds can be converted into 10,000 shares. Porter owns none of these bonds. What are the earnings per share amounts that Porter should report in its current year consolidated income statement?

Answer 1

Porter Corporation should report a basic earnings per share (EPS) of $6.10 and a diluted EPS of $5.83 in its current year's consolidated income statement.

Step-by-step explanation:

The question involves calculating basic and diluted earnings per share (EPS) for Porter Corporation on a consolidated basis, including its wholly-owned subsidiary, Street, Inc. First, we need to determine the combined net income by adding Porter and Street's net incomes and subtracting the annual amortization. The calculation is as follows:

• Porter's net income: $264,000
• Street's net income: $236,000
• Annual amortization: $12,000
• Combined net income: $264,000 + $236,000 - $12,000 = $488,000

Next, we need to calculate the basic EPS, which is the combined net income divided by Porter's outstanding shares:

• Basic EPS: $488,000 / 80,000 shares = $6.10 per share

To compute the diluted EPS, the potential conversion of convertible bonds into shares must be considered. We add the shares that could potentially be issued upon conversion to the outstanding shares and adjust the net income for the related bond interest expense that would no longer be incurred since the bonds would be converted into equity:

• Adjustment for bond interest expenses: $48,000 (Porter) + $36,000 (Street) = $84,000
• Adjusted net income: $488,000 + $84,000 = $572,000
• Potential additional shares from conversion of bonds: 8,000 (Porter) + 10,000 (Street) = 18,000 shares
• Total shares after conversion: 80,000 + 18,000 = 98,000 shares
• Diluted EPS: $572,000 / 98,000 shares = $5.83 per share

Hence, Porter should report a basic EPS of $6.10 and a diluted EPS of $5.83 in its consolidated income statement for the current year.