Davyn Muhammad Farrell

041911333141
AKL

10-2

a. Common stockholders' equity $ 380,000

Goodwill $ 75,000
Implied fair value $ 455,000

Purchase price (80% * implied fair value) $ 364,000

b. Common stockholders' equity $ 380,000

Preferred stockholders' equity
(1,000 share at 102 call price) $ 102,000
Total stockholders' equity $ 482,000

c. Income from subsidiary $ 36,000

Common stock portion of income
(Income from subsidiary /80%) $ 45,000
Net income $ 60,000
Preferred stock portion of income $ 15,000

Noncontrollling interest share - common

(20% * common stock portion of income) $ 9,000
Noncontrolling interest share - preferred
(100%* preferred stock portion of income) $ 15,000
Total noncontrolling interest share $ 24,000
10-3

Preliminary calculations

Book value of contructively retired preferred stock

(75% x $114,000) $ 85,500
Purchased price $ 75,000
Adjustments $ 10,500

Investment in Ron - preferred (+A) $ 75,000

Cash (-A) $ 75,000
To record acquisition of 75% of Ron's preferred stock

Investment in Ron - preferred (+A) $ 10,500

Other paid-in capital (+SE) $ 10,500
To adjust other paid-in capital to reflect the constructive retirement

Investment in Ron - common (+A) $ 36,000

Income from Ron - common (R, +SE) $ 36,000
To record equity in Ron's income to common
[($50,000 net income - $10,000 preferred income) x 90%)]

Investment in Ron - preferred (+A) $ 7,500

Income from Ron - preferred (R,+SE) $ 7,500
To record 75% of the $10,000 increase in Ron's
preferred dividend arrearage

Solution E10-8 [EPS]

1 a Sod’s diluted earnings for consolidated EPS purposes
Pal’s equity in Sod’s income $176,000/.8 $ 220,000

2 c
Sod’s outstanding shares 50,000 shares
Add: Incremental shares 10,000 shares - ($100,000
assumed proceeds/$20 average market price) 5,000 shares
Sod’s common shares and common share equivalents 55,000 shares

3 b
Pal’s net income $ 316,000
Less: Equity in Sod’s income (176,000)
Add: Equity in Sod’s diluted earnings (40,000 shares ´
Sod’s $4 diluted EPS) 160,000
Pal’s diluted earnings $ 300,000

4 d
Pal’s diluted earnings $300,000/300,000 Pal outstanding common shares = $1
10-9

San’s basic and diluted EPS

   Basic      Diluted  
Income to common (equal to San’s net income) = a $18,000 $18,000

Common shares and common share equivalents:

Outstanding shares 5,000 5,000
Additional shares using treasury stock method:
1,000 - (1,000 ´ $9)/$15 ________ 400
Common shares and common share equivalents = b 5,000 5,400
San’s EPS = a/b $ 3.60 $ 3.33

Put’s basic and diluted EPS

Income to common (equal to Put’s net income) $20,000 $20,000

Replacement of Put’s equity in San’s realized

income with Put’s equity in San’s diluted
earnings: Equity in San’s income to common
($18,000 ´ 80%) (14,400)
Equity in San’s diluted earnings
(4,000 shares ´ $3.33)         13,320
Put’s basic and diluted earnings = a $20,000 $18,920
Outstanding common shares = b 8,000 8,000
Put’s EPS = a/b $ 2.50 $ 2.37
10-10

   Basic      Diluted  
Sal’s earnings per share
a Net income $26,400 $26,400
Sal’s common shares outstanding 20,000 20,000
Incremental shares from warrants
Diluted: 5,000 — ($120,000 assumed
proceeds/$30 average price)         1,000

b Common shares and equivalents 20,000 21,000

Earnings per share $ 1.32 $ 1.26

Pin’s basic and diluted EPS

Pin’s income to common ($80,467 - $12,000
to preferred) $68,467 $68,467
Replacement computation:
Equity in Sal’s realized income (21,120)
Equity in Sal’s diluted EPS
16,000 shares ´ $1.26         20,160

a Earnings $68,467 $67,507

b Pin’s common shares outstanding 10,000 10,000

a/b Earnings per share $ 6.85 $ 6.75