P 10-5

[EPS] Computing EPS with convertible debentures Pam Corporation has $108,000 income from its own operations for 2016, and $42,000 income from Sun Corporation, its 70 percent–owned subsidiary. Sun’s net income of $60,000 consists of $66,000 operating income less $6,000 net-of-tax interest on its outstanding 10 percent convertible debentures. Throughout 2016, Pam has 100,000 shares of common stock outstanding, and Sun has 50,000 outstanding common shares.

REQuIRED 1. Compute Pam’s diluted earnings per share for 2016, assuming that Sun’s bonds are convertible into 10,000 shares of Sun’s common stock.

2. Compute Pam’s diluted earnings per share for 2016, assuming that Sun’s bonds are convertible into 10,000 shares of Pam’s common stock.

Subsidiary Preferred Stock, Consolidated Earnings per Share, and Consolidated Income Taxation 379