Chapter 10, Problem 10.32P

Earnings per Share with Convertible Securities

Branch Manufacturing Corporation owns 80 percent of the common shares of Short Retail Stores. The companies’ balance sheets as of December 31, 20X4, were as follows:

Short Retail’s 8 percent preferred stock is convertible into 12,000 shares of common stock, and its 10 percent bonds are convertible into 8,000 shares of common stock. Short reported net income of $49,200 for 20X4 and paid dividends of $30,000.

Branch Manufacturing has 11 percent preferred stock and 12 percent bonds outstanding, neither of which is convertible. Branch reported after-tax income, excluding investment income from Short, of $100,000 in 20X4 and paid dividends of $60,000. The companies file separate tax returns and are subject to a 40 percent income tax.

Required

Compute basic and diluted EPS for the consolidated entity.