The basic earnings per share should be reported at a. b. c. d. 4.85 4.57 3.64 3.

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Solution 49-10 answer a Net income per book Exceptional profit Adjusted net income Preference dividend for current year ( 4,000,000/2) Preference share premium payable upon redemption Net income to ordinary shares January1 (3,000,000 x 12/12 ) January1 (250,000 x 1/5 x 12/12 ) April 1 (600,000 x 9/12 ) July 1 (400,000 x 6/12 ) Average shares Basic earnings per share (16,000,000/ 3,300,000) Problem 49-11 (IFRS) Monopoly Company had 100,000 equity shares in issue on January 1, 2009. On July 1, 2009 it issued 20,000 new shares by way of a 1 for 5 bonus. On October 1, 2009 the entity issued 28,000 new shares for cash at full market price. When calculating basic earnings per share, how many shares should be divided into the profit after tax? a. b. c. d. 100,000 117,000 148,000 127,000 15,000,000 4,000,000 19,000,000 (2,000,000) (1,000,000) 16,000,000 3,000,000 50,000 450,000 ( 200,000) 3,300,000 4.85

Solution 49-11 Answer d Jan. 1 (100,000 + 20,000) Oct. 1 (28,000 x 3/12 ) Average shares 120,000 7,000 127,000

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Problem 49-12 (AICPA Adapted) The following information pertains to Jet Companys outstanding share capital for the current year: Ordinary share capital, P5 par value Share outstanding, 1/1 2-for-1 share split, 4/1 Share issued, 7/1 Preference share capital, P10 par value, 5% cumulative Share outstanding, 1/1 200,000 200,000 100,000 40,000

What is the number of shares that should be used in calculating earnings per share?

a. b. c. d.

400,000 450,000 500,000 540,000

Solution 49-12 Answer b January 1 (200,000 x 2 x 12/12) July 1 (100,000 x6/12 ) 400,000 50,000 450,000

The share split is recognized retroactively, meaning, it is treated as a change from the date tha original shares are issued. Thus, the balance of 200,000 shares on January 1 would become 400,000 as result of a 2-for-1 share split. Problem 49-13(AICPA Adapted) Timp Company had the following ordinary share transactions during the current year: 1/1 Ordinary shares outstanding 2/1 Issued a 10% stock dividend 3/1 Issued ordinary shares in a purchase combination 7/1 Issued ordinary shares for cash 12/31 Ordinary shares outstanding What was the weighted average number of shares outding? 300,000 30,000 90,000 80,000 500,000

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a. b. c. d.

400,000 442,500 445,000 460,000

Solution 49-13 answer c January 1 300,000 x 1.10 x 12/12 March 1 90,000 x 10/12 July 1 80,000 x 6/12 Average number of shares 330,000 75,000 40,000 445,000

The stock dividend is treated as a change from the date the original shares are issued. Thus, the balance of 300,000 on January 1 would become 330,000 shares. Problem 49-14 (IAA) On January 1, 2009, Nissan Company had 100,000 ordinary shares outstanding. During the current year, the following events occurred: March 1 June 1 September 1 2-for-1 share split Issued 30,000 additional shares 20% stock Dividend

What was the weighted average number of shares outstanding for the year?

a. b. c. d.

276,000 261,000 230,000 256,000

Solution 49-14 Answer b January 1 (100,000 x 2 1.20 x 12/12) June 1 (30,000 x 1.20 x 7/12 ) Average number of shares 240,000 21,000 261,000

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Problem 49-15 (IAA) Shane Company had 100,000 ordinary shares issued and outstanding at January 1, 2009. during the current year, Shane also had the ordinary share transactions listed below. April May June July December 1 1 30 30 31 Issued 30,000 previously unissued shares Split the share 2 for 1 Purchased 10,000 shares for the treasury Distributed a 20 percent stock dividend Spilt the share 3 for 1

What is the weighted average number of shares that should be used for earnings per share purposes? a. b. c. d. 288,000 864,000 882,000 972,000

Solution 49-15 Answer d January April June 1 (100,000 x 2 x1.20 x 3 x 12/12) 1 (30,000 x 2 x1.20 x 3 x 9/12 ) 30 (10,000 x 1.20 x 3 x 6/12 ) 720,000 162,000 ( 18,000) 864,000

Problem 49-16 (IAA)

Helen Company provided the following share transactions for the current year: January 1 February 1 May 1 August 1 September 1 November 1 Shares outstanding Issued for cash Acquired treasury shares 25% stock dividend Resold treasury Issued 3 for 1 share spilt 44,000 56,000 25,000 10,000

What is the weighted average number of shares for EPS computation? a. b. c. d. 305,000 307,500 103,750 311,250

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Solution 49-16 answer a January 1 (44,000 x 1.25 x 3 x 12/12) Febuarary 1 (56,000 x 1.25 x 3 x 11/12) May 1 (25,000 x 1.25 x 3 x 8/12) September1 (10,000 x 3 x 4/12 ) Problem 49-17(IAA) 165,000 192,500 (62,500) 10,000 305,000

Wisconsin Company had 250,000 ordinary shares outstanding on January 1, 2009. during 2009 and 2010, the following tansactions took place. 2009 March 1 July 1 October 1 December 1 Sold 24,000 shares Issued a 20 percent stock dividend Sold 16,000 shares Purchases 15,000 shares to be held in treasury

2010

June 1 3 for 1 split September 1 Sold 60,000 shares

1. What is the weighted average number of shares for 2009 to be used in the earnings per share computation for comparative financial statements at the end of 2010?

a.980,250 b.329,800 c. 984,000 d.969,000

2. What is the weighted number of shares for 2010 to be used in the earnings per share computation for comparative financial statements at the end of 2010?

a.1,0009,400 b. 1,049,400

c. d.

1,169,400 989,400

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Solution 49-17 Question 1 Answer a 2009 January 1 (250,000 x 1.20 x 3 x 12/12 March 1 (24,000 x 1.20 x 3 x 10/12 October 1 (16,000 x 3 x 3/12 December 1 (15,000 x 3 x 1/12 ) ) ) ) 900,000 72,000 12,000 ( 3,750) 980,250 250,000 24,000 54,800 16,000 ( 15,000) 329,800

January 1, 2009 March 1, 2009 July 1, 2009 (20% x 247,000) October 1, 2009 December 1, 2009 Outstanding Shares 12/13/2009 Solution 2 Answer a 2010 January September 1 (329,800 x 3 x 12/12) 1 (60,000 x 4/12 )

989,400 20,000 1,009,400

Problem 49-18 (AICPA Adapted) Rand Company had 20,000 ordinary shares outstanding at January 1, 2009. On May 1, 2009, it issued 10,500 ordinary share. Outstanding all year were 10,000 nonconvertible and noncummulative preference shares on which the annual dividend of P40 per share was paid in December 2009. Net income for 2009 was P967,000 Rands basic earnings per share for 2009 should be

a. b. c. d.

18.60 21.00 28.40 35.80

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Solution 49-18 Answer b January 1 - 20,000 x 12/12 May 1 - 10,500 x 8/12 Average number of shares Net income Less: Preference dividend (10,000 x P40) Net income to ordinary shares Basic EPS (567,000/27,000) Problem 49-19 (AICPA Adapted) Strauch Company had one class of ordinary share capital outstanding and no other securities that are potentially convertible into ordinary shares. During 2009, 100,000 shares were outstanding. In 2010, two distributions of additional ordinary shares occurred: on April 1, 20,000 shares of treasury were sold, and on July 1, a 2-for-1 share split was issued. Net income was P410,000 in 2010 and P350,000 in 2009. What amount should Strauch report as basic earnings per share in its comparative income statement? a. b. c. d. 2010 1.78 1.78 2.34 2.34 2009 3.50 1.75 1.75 3.50 20,000 7,000 27,000 967,000 400,000 567,000 21.00

Solution 49-19 Answer b 2010 EPS (410,000/ 230,000) January 1, 2010 200,000 x 12/12 April 1, 2010 20,000 x 2 x9/12 Average number of shares 2009 EPS (350,000 / 200,000) December 31, 2009 balance July 1, 2010 2-for-1 share split Total ordinary shares December 31, 2009 1.78 200,000 30,000 230,000 1.75 100,000 100,000 200,000

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In the case of stock dividend or share split, the number of ordinary shares outstanding before the event is adjusted as if the event occurred at the begenninng of the earliest period reported. Accordingly, the 100,000 shares outstanding on December 31, 2009 shall be adjusted to 200,000 shares because of the 2-for-1 split on July 1, 2010. Problem 49-20 (IAA) The income statement of Laguna Company for the year ended December 31, 2009 showed net income ofP15, 000,000. The net income for 2009 reflects an income tax rate of 30%. Included in the net income is a casualty loss of P5, 000,000 before income tax. The equity of Laguna Company on December 31, 2009 showed the following details: Preference share capital 10% cumulative, P50 Par value, 100,000 shares Ordinary share capital, P100 par value Share premium Retained Earnings Treasury ordinary shares, 50,000, at cost Laguna Company should report basic earnings per share at 5,000,000 30,000,000 10,000,000 18,000,000 4,000,000

a. b. c. d.

58.00 60.00 73.60 48.33

Solution 49-20 Anwer a Ordinary shares issued (30,000,000/100) Treasury shares Ordinary shares outstanding Net income Less: Preference dividend (10% x 5,000,000) Net income to ordinary shares Basic EPS (14,500,000 / 250,000) Problem 49-21 (IFRS) 300,000 ( 50,000) 250,000 15,000,000 500,000 14.500,000 58

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On January 1, 2009, Sabina Company had ordinary shares capital outstanding of P100 par value, 200,000 shares or a total par value of 20,000,000. On July 1, 2009, a bonus issue was made in the ratio of one additional ordinary share for each original share. Tha net income for 2009 was P12, 000,000. The income statement should report basic earnings per share at a. b. c. d. 30 40 20 60

Solution 49-21 Answers a Ordinary share January 1 Bonus issue - July 1 Total ordinary shares Basic EPS (12,000,000/400,000) The bonus issue is the equivalent of a stock dividend. 200,000 200,000 400,000 30

Problem 49-22 (Application Guidance PAS 33) On January 1, 2009, Gina Company had 300,000 ordinary shares outstanding, P100 par or a total par value of P30, 000,000. During 2009, Gina issued rights to acquire one ordinary share at P100 in the ratio of one share for every 5 shares held. The rights are exercised on March 31, 2009. The market value of each ordinary share immediately prior to March 31, 2009 was P160. The net income for 2009 was P6, 000,000. The income statement should report basic earnings per share at

a. b. c.

d.

17.14 16.67 18.75 17.39

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Solution 49-22 Answer a The theoretical value of a right is computes as follows: Market value of share right-on minus subscription price Number of rights to purchase one share plus 1 = Value of one right

Applying the formula, the theoretical value of one right is: 160 100 5 + 1 = 60 6 = P10 per right

Market value of share right on Theoretical value of share ex-right Market value of share ex-right Adjusted factor

160 10 150 160/150

The number of ordinary shares outstanding prior to the exercise of the rights is multiplied by the adjustment factor whose numerator is thew market value of the share right-on and whose denominator is the market value of the share ex-right Ordinary shares on January 1 Ordinary share issued through exercise of rights on March 31 (300,000/5) Total Ordinary shares on March 31 January 1 300,000 x 160/150 x 3/12 March 31 360,000 x 9/12 Average number of shares Basic EPS (6,000,000/350,000) 300,000 60,000 360,000 80,000 270,000 350,000 17.14

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Problem 49-23 (Application Guidance PAS 33) Excel Company had 600,000 ordinary shares outstanding on January 1, 2009. During 2009, Excel issued rights to acquire one ordinary share at P10 in the ratio of one new share for every 4 shares outstanding. The market value of the ordinary share immediately prior to the rights issue is P35. The rights were exercised on October 1, 2009. Excel Company shall report basic earnings per share in its income statement at a. b. c. d. 11.40 12.00 14.25 13.41

Solution 49-23 Answer b Theoretical value of right = = Market value of share right on Theoretical value of right Market value of share ex-right Adjustment factor Ordinary shares on January 1 Ordianry shares issued through exercise of rights on October 1 (600,000/4) Total ordinary shares October 1 January 1 600,000 x 35/30 x 9/12 October 1 750,000 x 3/12 Average number of ordinary shares Basic EPS (8,550,000/ 712,500) 35-10 4 +1 5 35 5 30 35/30 600,000 150,000 750,000 525,000 187,500 712,500 12.00

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50
DILUTED EARINGS PER SHARE
Problem 50-1(AICPA Adapted) Cox Company had 1,200,000 ordinary shares outstanding on January 1 and December 31, 2009. in connection with the acquisition of a subsidiary in June 2008, Cox is required to issue 50,000 additional ordinary shares on July 1, 2010 to the former owners of the subsidiary. Con paid P200m000 annual preference dividend in2009 and reports net income of P3, 400,000 for the dividend in2009 and reported net income of P3,400,000 for the year. The preference share capital is noncomulative and nonconvertible. Coxs diluted earnings per share should be a. b. c. d. 2.83 2.72 2.67 2.56

Solution 50-1 Answer d Ordinary shares outstanding Potential ordinary shares to be issued in the acquisiton of subsidiary Total ordinary shares Net income Less: Preference dividend Net income to ordinary shares Diluted earnings per share (3,200,000/1,250,000) 1,200,000 50,000 1,250,000 3,400,000 200,000 3,200,000 2.56

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Problem 50-2 (AICPA Adapted) Dunn Company had 200,000 shares of P20 par value and 20,000 shares of P100 par 6% cumulative, convertible preference share capital outstanding for the entire year ended December 31, 2009. Each preference share is convertible into 5 ordinary shares. Dunns net income for 2009 was P840, 000. For the year ended December 31 2009, the diluted earnings per share should be a. b. c. d. 2.40 2.80 3.60 4.20

Solution 50-2 Answer b Ordinary share outstanding Potential ordinary share to be issued fro conversion of preference shares (20,000 x 5) Total ordinary share Diluted EPS (840,000/300,000) 200,000 100,000 300,000 2.80

Under diluted EPS, the annual dividend on the convertible preference share is no longer deducted from net income because it is assumed that the prefere4nce share is already converted into ordinary share. Problem 50-3(IAA) Vios Company had 100,000 ordinary shares outstanding on January 1, 2009. In addition, on January 1, 2009, the entity had issued 10,000 convertible cumulative 5% preference share with P100 par. These preference shares were converted into six ordinary shares. The preference dividends for their entire year were paid in full before the conversion. The entity has no other potentially dilutive securities. Net income for 2009 was P2, 000,000. 1. What is the amount of Basic earnings per share? a. b. c. d. 20.00 19.50 16.67 16.25

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2. What is the amount of diluted earnings per share? a. b. c. d. 12.50 12.19 16.25 19.50

Solution 50-3 Question 1 Answer d January 1 Outsanding September 1 Conversion (10,000x 6x4/12) Average number of shares Net income Prefernce dividend (5% x 1,000,000) Net income to ordinary share Basic EPS (1,950,000/120,000) Question 2 answer a January 1 Outstanding September 1 Convertible (100,000 x 6) Total ordinary shares Diluted EPS (2,000,000/160,000) 100,000 60,000 160,000 12.50 100,000 20,000 120,000 2,000,000 (50,000) 1,950,000 16.25

The issuance of ordinary shares o September 1 is not averaged anymore because the convertible preference shares are outstanding on January 1. Again, under diluted EPS, the annual dividend on convertible preference share is no longer deducted from net income.

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Problem 50-4 (AICPA Adapted) At January 1, 2009, Lex Company had 600,000 ordinary shares outstanding. On April 1, 2009, an additional 180,000 ordinary shares were issued for cash. Lex also had P5, 000,000 of 8% convertible bonds outstanding during 2009, which are convertible into 150,000 ordinary shares. The bonds are dilutive in the 2009 earnings per share computation. No bonds were issued or converted into ordinary shares during 2009 What is the number of shares that should be used in computing diluted earnings per share for 2009? a. b. c. d. 735,000 780,000 885,000 930,000

Solution 50-4 Answer c Ordinary shares outstanding on January 1 Ordinary shares issued on April 1 (180,000x 9/12) Potential ordinary shares to be issued for bond conversion Total ordinary shares 600,000 135,000 150,000 885,000

Problem 50-5(IAA) Fortuner Company had 200,000 ordinary shares outstanding on January 1, 2009. In addition, on January 1, 2009, the entity had issued 4,000 convertible 10% bonds with P1, 000 face values. The entity has no other potentially dilutive securities. The bonds were converted on October 1, 2009 and 40 ordinary shares were issued in exchange for each bond. Accrued interest on the bonds was recognized and paid on that date. Net income for 2009 was P5, 000,000. The income tax is 30%

1.
a. b. c. d.

What is the amount of basic earnings per share? 25.00 13.80 20.83 15.62

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2.
a. b. c. d.

What is the amount of diluted earnings per share? 14.47 21.65 14.72 14.61

Solution 50-5 Question 1 Answer c January 1 Outstanding October 1 Conversion (4,000 x 40 x 3/12) Average number of shares Basic EPS (5,000,000/ 240,000) Question 2 Answer a January 1 Outstanding October 1 Conversion (4,000 x 40) 200,000 160,000 200,000 40,000 240,000 20.83

The issuance of the ordinary shares on October 1 is not averaged anymore because the convertible bonds are outstanding on January 1. Net income Interest on bnds net tax from January 1 to October 1 (4,000,000 x 10% x 9/12 x 70%) Adjusted income Divided by ordinary shares Diluted EPS 5,000,000 210,000 5,210,000 360,000 14.47

The after-tax actual interest paid on the bond up to the date of conversion is added back to net income. Problem 50-6(AICPA Adapted) On June 30, 2008, Lomond Company issued Twenty, P10, 000, 7% bonds at par. Each bond was convertible into 200 ordinary shares. On January 1, 2009, 10,000 ordinary shares were outstanding. The bondholders converted all the bonds on July 1, 2009.

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The following amounts were reported in Lomonds income statement for the year ended December 31, 2009: Revenue Operating expenses Interest on bonds Income before tax Income tax at 30% Net income What amount should Lomond reported as diluted earnings per share? a. b. c. d. 2.50 2.85 2.92 3.00 977,000 (920,000) ( 7,000) 50,000 (15,000) 35,000

Solution 50-6 Answer b Ordinary shares outstanding Ordinary shares issued for the bonds conversion on July 1 (20x 200) Total Ordinary shares Net income Add: Interest on Bonds from January to July 1, 2009 (200,000 x 7% x 6/12) 7,000 Income tax (30% x 7,000) (2,100) Adjusted income Diluted EPS (39,000/14,000) Problem 50-7 (IAA) Atlantic Company has the following capital structure at January 1, 2009. Ordinary share capital, P10 par value, 800,000 shares 8,000,000 12% stated interest rate convertible bonds issued at face value, each P1,000 bond is convertible into 80 ordinary shares 5,000,000 10,000 4,000 14,000

4,900 39,900 2.85

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During 2009, Atlantic Company had th following share transaction: May 1 July 1 Oct.1 Dec.31 1. a. b. c. d. 2. a. b. c. d. Issued 60,000 ordinary shares for P30 per share Purchased 100,000 ordinary shares of treasury at 35 per share. Converted P2, 000,000 face values of bonds. Net income for 2009 was P9, 500,000. The income tax rate is 30%

What is the amount of basic earnings per share? 11.45 11.88 10.33 10.80 what is the amount of diluted earnings per share? 8.30 8.44 8.33 8.48

Solution 50-7 Question 1 Answer a January 1 outstanding May 1 (60,000 x 8/12) July 1 (100,000 x 6/12) October 1 (2,000 x 80 x 3/12) Average number of shares Basic EPS (9,500,000/830,000) Question 2 Answer a January 1 Outstanding January 1 (5,000 x 80) May 1 (60,000 x 8/12) July 1 (100,000 x 6/12) Average number of shares 800,000 400,000 40,000 (50,000) 1,190,000 800,000 40,000 ( 50,000) 40,000 830,000 11.45

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All of the 5,000 are assumed to be converted on January 1, 2009 because the convertible bonds are outstanding on January 1, 2009. Net income Interest on bonds actually converted on October 1 (2,000,000 x 12% x 9/12) Interest on Bonds not converted (3,000,000 x 12%) Total interest Tax effect (30% x 540,000) Adjusted income Diluted EPS (9,878,000/ 1,190,000) Problem 50-8 (AICPA Adapted) Mann Company had 300,000 ordinary shares issued and outstanding at January 1, 2009. On July 1, 2009, an additional 50,000 ordinary shares were issued fro cash. Mann also had unexercised share options to purchase 40,000 ordinary shares at P15 per share outstanding at the beginning and end o f2009. No value was assigned to the share options. The average market price of Manns ordinary share was P20 during 2009. What is the number of shares that should be used in computing diluted earnings per share? a. b. c. d. 325,000 335,000 360,000 365,000 9,500,000 180,000 360,000` 540,000 (162,000)

378,000 9,878,000 8.30

Solution 59-8 answer b Ordinary shares outstanding on January 1 Ordinary share issued on July 1 (50,000 x 6/12) Share option outstanding Assumed treasury shares (600,000/ 20) Average number of shares 300,000 25,000 40,000 ( 30,000) 335,000

The proceeds of P600, 000 (40,000 x 15) from the exercise of the share option are assumed to acquired treasury shares at the average market price.

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Problem 50-9 (IFRS) On January 1, 2009, Bergen Company issued 4,000,000 convertible bonds at face value of P10 or total of 40,000,000. the bonds mature in 3 years and can be converted into two ordinary shares for each bond. The entity can settle the principal amount of the bond in ordinary shares or in cash but the entity is likely to settle the contract by issuing shares. When the bonds are issued, the interest rate fort similar debt without conversion rights is 10% and the market value of an ordinary share id P4. the profit attribute to ordinary shareholders fro 2009 is P33,000,000 and there are 10,000,0000 ordinary shares outstanding during the current year. The income tax rate is 30%. The proceeds from the issuance of the bonds are allocated as follows: Liability component Equity component Total proceeds 30,000,000 10,000,000 40,000,000

What should be reported as diluted earnings per share for 2009? a. b. c. d. 2.00 1.95 3.30 3.51

Solution 50-9 Answer b Net income Interest on bonds (10% x 30,000,000 x 70%) Adjusted net income Ordinary shares outstanding Potential ordinary shares from bond conversion (4,000,000x2) Total ordinary shares Diluted earnings per share (35,000,000 / 18,000,000) 33,000,000 2,100,000 35,100,000 10,000,000 8,000,000 18,000,000 1.95

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