 Hello and welcome to the session in which we will discuss Consolidated earnings per share or for short EPS Earnings per share is required to be disclosed by publicly traded companies. Now we did cover this topic in intermediate accounting This lesson is designed more for advanced accounting courses Why because we're gonna be discussing learning on how to prepare Consolidated earnings per share Consolidated means we have a parent some sort of a parent subsidiary relationship and we are preparing earnings per share for the parent company Now we have to remember that we have to compute both basic as well as diluted earnings per share Basic earnings per share It's gonna be computed taken rather than just net income as we learn in intermediate accounting consolidated net income minus the preferred dividend Divided by the weighted average number of shares outstanding and the diluted Exists when we have stock options stock warrant convertible that can any any sort of convertible securities And we discuss this topic in details in intermediate accounting now For advanced accounting consolidated earnings per share what we're gonna be adding is the idea that the subsidiary the sub Might have some convertible Securities some what we called dilutive securities like options warrant convertible bonds convertible preferred when those Securities exist we might have a slight complication or we might have to make certain adjustments First we have to compute the sub diluted first So we have to compute the EPS for the sub for basic and dilutive first now why because the ownership structure with change When we compute the what if EPS dilutive what does that mean? It means if the sub has options and those options because remember in the dilutive securities Scenario we assume that the options are exercised or the convertible bonds or preferred stocks are actually converted when that happens The number shares of common stock overall will change and as a result the parent ownership level will fluctuate usually it goes down So because of that what we have to do first. We have to compute the basic and the dilutive for the sub Then we will compute the earnings per share basic and diluted for the parent But at this point we're gonna take into account the net income attributed the diluted portion of the sub To compute the parents diluted Well, this is all you know basically talking the best way to illustrate this is to look at a comprehensive example But the point you have to remember is this First you compute the basic and dilutive for the sub Then if the sub has a dilutive Option which is dilutive EPS then we're gonna take the net income that we contributed to the diluted and use it in the parent Consolidated net income when we compute the dilutive the best way once again to look at a comprehensive example Before we proceed any further. 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So if all the preferred are converted They would convert into 40,000 common stock. This is for the parent company. The preferred pays $5 per stock dividend The parent company owns 90% of a sub Six and 90% of the sub common stock and 60% of the preferred stock So the sub has both common stock and preferred stock. We own 90% of the common 60% of the preferred now the sub Has 20,000 of common stock remember if they have 20,000 18,000 of those are owned by the parent and 4,000 of preferred stock a force of which 6,000 is owned by the parent and the preferred stock pays $3 per share Which is $3 times 4,000 is $12,000 per year. That's how much they pay for their preferred dividend The preferred shares are converted into 8,000 common stock for the sub which is again same conversion rate for every preferred you get two and you can convert into 8,000 Also, the sub has 200,000 convertible bond issued at face value paying 10% which is $20,000 a year bonds are convertible into 9,000 shares of sub stocks So those bonds they can be converted into 10 9,000 shares We're gonna assume a tax rate for this example of 21% why do we need the tax rate is because when we convert from That when we convert the bond we have to remove the interest expense The interest expense has to be removed at net of interest, which we'll see how we do that later Because of the relationship the consolidated relationship there is an annual access Immortization of 25,000 attributed to various intangibles. So when the parent bought the sub As a result of this consolidation process, we have an annual access Immortization of 25,000 the parent reported half a million of income and the sub reported $100,000 of income what we're gonna do now is compute the net income Attributed to parent company. Okay, let's start with the parent net income, which is half a million This is basically the same information that was on the prior slide Then we're gonna add to it the subnet income. So what is the subnet income? Well, the subnet income we're starting with 100,000 and we have to deduct the access Immortization which is 25,000 which will give us sub income after access fair value is 75,000 That's the sub income now remember consolidated net income is the Parent plus the sub Which is 575 but we're looking at the net income attributed only to the parent now This is the consolidated net income. You know, we're gonna have to do we're gonna have to deduct to deduct from this The 10% of common stock NCI. Well, remember The sub Generated net income of 75 they paid dividend of 12 So 75 minus 12 will give will give us 63,000 that's net income Allocated to the common stock common stock holders now of that 63,000 10% we don't own dream the remainder we do own therefore we have to multiply it by 10% and deduct 6300 from the 575 because it doesn't belong to us it belongs to the Common shareholders of the sub the minority interest. That's the first thing we have to deduct Also, remember that the company paid the sub paid 12,000 in dividend. Well of that 12,060 percent is ours. That's good. Well, the remainder 40 percent is not ours So also we have to deduct this portion, which is 12,000 times 40 percent 4,800 will also need to be deducted and Once we deduct those two figures we come up with net income attributed to the parent, which is 575 minus 6,300 minus 4,800 563,900 Now keep keep track of this number or just make a note of it because we're gonna be using it later to compute the parent basic Eps Now before we compute the parent basic Eps, we're gonna have to compute the sub basic and the sub diluted Eps They do have dilute of securities as you saw at the beginning. They have convertible bonds and convertible preferred Let's first compute the basic which is pretty straightforward, which is net income attributed to two common shareholders, which is 75,000 minus 12 75,000 of income minus 12,000 equal to 63 divided by the common stock, which is 20,000 so 63,000 divided by 20,000 the basic Eps is $3 and 15 cent so that's the basic now we have to compute the dilutive and again They do have dilutive securities what we have to do now is remember in this in this formula. We have 63,000 Divided by 20,000 so this is the basic so this is the formula for the basic Eps now what we do we have to convert the basic into dilutive because they have dilutive securities, okay now Let's let's have the complete formula 75,000. Let me go back to read before I switch colors So we have 75,000 and the numerator go back to read here We have 75,000 minus 12 okay, this was the basic now The dilutive is different the dilutive is basically we assume if the preferred shares were converted if those preferred were converted We're gonna add back the dividend because we no longer have to pay the dividend and we have to add back to the numeric to the denominator 8,000 so let's see if the preferred are dilutive. Well, here's what's gonna happen It's gonna be the numerator 75,000 Minus 12,000 plus 12,000 equal to 0 so it's gonna be 75,000 divided by 28,000 and that's gonna give us $2 and 67 which is less than 315. It means that the preferred idle are dilutive which we include Okay, now so we did we did find out that the preferred are dilutive Let's find out if the bonds are dilutive Well, what's gonna happen is this if we convert the bonds the 20 the 200,000 dollar bonds which they are paying interest of 20,000 well if they're paying interest of 20,000 we're supposed to add to the numerator 20,000 well, that's right if we convert them. We don't have to pay interest But here's what happened if we deduct $20,000 of interest expense from the income statement. That's the good news The bad news is if we deducted it's gonna increase our taxable income By 20,000 which will increase our tax bill by the tax rate It will increase our tax bill by whatever our taxable income is times 21 percent 21 not 26 So simply put if we remove the interest Well, we're gonna add the interest but it's gonna be added net of tax because we're gonna Have less expense for interest expense 20,000 less but our tax expense will go up. How much our tax expense goes up? Well, it's easy. It's gonna go up by 20,000 times 1 minus the tax rate, which is 0.21 So let's do this. So if we take 1 minus 0.21, that's equal to 0.79 So we're gonna take 20,000 times 0.79 and that's gonna give us 15,800 we would say this 15,800 is interest net of Tax that's the amount that we will add now. Let me let me let me explain this one more time because this is important The concept of net of tax Simply put Because you lost a deduction of 20,000 because you lost this deduction your tax bill went up by how much? What's the difference between 15,800 and 20,000 your tax bill went up by 4,200 because you lost that deduction you took away a deduction of 20,000. Well, your tax bill went up by The 20,000 times the tax rate. So if you take 20,000 if we take 20,000 times point to one 20,000 times point to one, that's 4,200 so you lost this much It's a lost deduction lost deduction the 4,200 means your tax bill went up Okay, so this is what we meant by you add the interest net of tax now you add the interest in the numerator now also What's gonna happen is you're gonna have to add the New shares the new 9,000 shares in the denominator now. We are ready to compute the full dilute of EPS. So it's going to be So it's going to be 75,000 minus 12 plus 12 they cancel each other out plus 15,000 divided by 20,000 plus 8,000 plus 9,000 245 so indeed the Dilute the sub has a dilute of securities now what we have to Now pay attention to is what is the net income that we used to compute the dilute of shares? Well, the net income is that one 75,000 plus 15,800 which is dilute of net income equal to 90,800 That's the dilute of income. But what happened after we Did the dilute of income if we assume that indeed happen? Well the parent ownership will change because before the conversion before the what if conversion the parent owned 90% of the 20,000 which is 18,000 shares now after the conversion if we assume the conversion did occur Well, guess what's going to happen the ownership structure will change. So how would it change? Well after the conversion? Here's what's going to happen. We have 60 percent of preferred stock that we owned We own 60 percent that's going to give us an additional 4,800 so we started with 18,000 shares our original ownership of 90 percent Then if the conversion occur It's going to add 4,800. So now we owned 22,800 of the company common stock. That's the good news The bad news is this If we convert the denominator the denominator the denominator, which is 20,000 plus 8,000 plus 9,000 becomes 37,000 now we own 20 uh now we own Now we own 22,800 shares divided by 37,000 shares. What does that mean? It means if the conversion did occur our ownership level will go down to 62 percent Therefore what we have to do is we have to say our net income is signed to dilutive computation Is only 62 percent of the 90,800 because when we compute our dilutive the consolidated dilutive We have to use the sub income of only 56,296 which is 62 percent of 90,800 Now let's compute the parent. Well, let's start with the basic. The basic is taking the 563,900 computed earlier minus 100,000 in preferred dividend equal to 463,900 that's in the numerator then we'll divide this by the denominator, which is the number of shares outstanding 100,000 shares We'll give us basic earnings per share of 4.639 Now let's compute the dilutive which is going to be half a million plus the 56,298 which was 90,800 times 62 percent If I remember this number correctly divided by the original 100,000 shares And now we're computing the dilutive for the for the parent. The parent has 20,000 shares of convertible Into two so that's going to be 20,000 times two plus 40,000 shares It's going to give us 3.97 which is a dilutive Indeed dilutive because eps went down. So this is how you compute the parent basic and the parent dilutive Now i'm going to have to tell you this is advanced accounting If you want to go back and learn about basic eps without the consolidation Go to far hat lectures to into my intermediate accounting course and to the eps specifically This is where we learn eps in advanced accounting You would learn earnings per share when you have consolidated entities Anyway, go to my advanced accounting course work additional mcqs Look at additional questions. That's going to help you understand this important topic earnings per share specifically Consolidated earnings per share. Good luck. Study hard