Question

K owned 80% of the common stock of S. S had 50,000 shares of $5 par...

K owned 80% of the common stock of S. S had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10.00 and is convertible into four shares of common stock. K did not own any of S’s preferred stock. S also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. S’s annual after-tax interest expense for the bonds was $22,000. K did not own any of S’s bonds. S reported income of $300,000 for 2018. Compute the amount of S;s earnings that should be included in calculating consolidated diluted earnings per share.

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Answer #1
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Explanation :
no of share = 50,000 shares x 80% = 40,000
because of convertible debentures and preference shares, there will be a change in no of the share of Stoop
previously there are 50000 shares
preference shares conversion= 4shares for each share= 4 x 2000= 8000
bonds conversion = 600 x 10 = 6000
new no of shares of stoop = 50000+8000+6000=64000 share
new percentage of aquisition = 40000/64000=62.5%
pre tax income of Stoop = 300000 + 22000=322000(adding back of post tax interest of bonds)
So, the amount of stoop earnings to be included= 322000 x 62.5%
= $201,250
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