P 10-8

[EPS] Compute consolidated EPS; subsidiary diluted Pop Company owns 40,000 of 50,000 outstanding shares of Son Company, and during 2016, it recognizes income from Son as follows:

Share of Son net income ($500,000 * 80%) $ 400,000 Patent amortization (50,000)

Unrealized profit—downstream sales (40,000)

Unrealized profit—upstream sales ($60,000 * 80%) (48,000)

Income from Son $262,000 Pop’s net income for 2016 is $1,262,000, consisting of separate income from Pop of $1,000,000 and $262,000 income from Son. Pop has 100,000 shares of common stock outstanding, but no common stock equivalents or other potentially dilutive securities.

Son has $100,000 par of 10 percent convertible bonds outstanding that are convertible into 10,000 shares of Son common stock. The net-of-tax interest on the bonds is $6,400, and Son’s diluted earnings per share for purposes of computing consolidated earnings per share are determined as follows:

Net income $500,000 Add: Net-of-tax interest on convertible bonds 6,400 Less: Unrealized profit on upstream sales (60,000)

a Diluted earnings $446,400 Common shares outstanding 50,000 Shares issuable on conversion of bonds 10,000 b Common shares and equivalents 60,000 Diluted earnings per share (a ,

b) $7.44 REQuIRED: Compute Pop Company’s and consolidated diluted earnings per share for 2016.