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.