Pain Corporation holds 90 percent of Soothing Company's common shares but none of its preferred shares.On the date of acquisition,the fair value of the noncontrolling interest was equal to 10 percent of the book value of Soothing Company.Summary balance sheets for the companies on December 31,20X8,are as follows:
Pain's preferred pays a 8 percent annual dividend,and Soothing's preferred pays a 10 percent dividend.Soothing's preferred shares can be converted into 20,000 shares of common stock at any time.Soothing reported net income of $35,000 and paid a total of $10,000 of dividends in 20X8.Pain reported income from its separate operations of $80,000 and paid total dividends of $25,000 in 20X8.
-Based on the information provided,what is the diluted earnings per share for the consolidated entity for 20X8?

Question

Pain Corporation holds 90 percent of Soothing Company's common shares but none of its preferred shares.On the date of acquisition,the fair value of the noncontrolling interest was equal to 10 percent of the book value of Soothing Company.Summary balance sheets for the companies on December 31,20X8,are as follows:
  Pain's preferred pays a 8 percent annual dividend,and Soothing's preferred pays a 10 percent dividend.Soothing's preferred shares can be converted into 20,000 shares of common stock at any time.Soothing reported net income of $35,000 and paid a total of $10,000 of dividends in 20X8.Pain reported income from its separate operations of $80,000 and paid total dividends of $25,000 in 20X8.
-Based on the information provided,what is the diluted earnings per share for the consolidated entity for 20X8?

Quizplus · Accepted Answer

First, we need to find the net income attributable to common shareholders of Soothing Company:

Net Income - Preferred Dividends = Net Income Attributable to Common Shareholders

$35,000 - ($150,000 x 10%) = $20,000

Then, we need to adjust for the dilution that would occur if all of the preferred shares were converted:

$20,000 + ($15,000 x 90%) + ($7,500 x 90%) / (20,000 + 1,800) = $35,700

($15,000 x 90%) and ($7,500 x 90%) represent the dividends that would no longer need to be paid if all of the preferred shares were converted.

Finally, we divide the adjusted net income by the weighted average number of common shares outstanding:

($80,000 + $35,700) / 22,000 = $4.33 per share.

Therefore, the answer is B.

Pain Corporation Holds 90 Percent of Soothing Company's Common Shares