Earnings per Share

As an illustration computation of consolidated earnings per share peerless Products and

Special Foods. Assume the following:

1) Peerless products purchases 80 percent of the stock of Special Foods on December

31.19x1, at book value.
2) Both Special Foods and Peerless products have effective income tax rates of 40 percent
and file a consolidated tax return.
3) Special Foods has 19X1 income before taxes of $50,000, an allocated share of
consolidated income taxes of $20,000, and net income of $30,000.
4) Consolidated net income for 19X1 is $108,000, computed as follows:

Peerless’s separate operating income $140,000

Special Foods’ income before taxes 50,000

Total entity income taxes $190,000

Consolidated income taxes (40%) (76,000)

Total entity income after taxes $114,000

Less: income to no controlling shareholders ($30,000X.20) (6,000)

Consolidated net income $108,000

5) Peerless‘s capital structure consists of 100,000 shares of $5 par value common stock and
10,000 shares of $10 par.10 percent convertible preferred stock. The preferred stock is
convertible into 25,000 shares of peerless’s common.
6) Special Foods has 20,000 shares of $10 par value common stock and $100,000 of 6
percent convertible bonds outstanding .The bonds, issued at par, are convertible into
4,000 shares of Special Foods ‘common stock.
7) On January 1,19X1, Special Foods grants its officers options to purchase 9,000 shares of
common stock of Peerless products at $26 per share at any time during the five years
following the grant. None are exercised during 19X1.The average market price of
peerless’s common stock during 19X1 is $29 per share.

Required:

Computation of consolidated Earnings per Share (EPS):

a) Basic EPS
b) Diluted EPS