PAS 33-Earnings per Share and Diluted PDF

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CHAPT CHAPTER ER 31 PAS 33 33-- EARNING EARNINGS S PER SHARE BASIC EARNIN EARNINGS GS PER SHARE Simple Problems PROB PROBLEM LEM 31-1 (AICPA Adapted) On December 31, 2019 and 2018, Gow Company had 100,000 ordinary shares and 10,000 cumulative preference shares of 5%, P100 par value. No dividends were declared on either the preference or ordinary shares in 2019 or 2018. Net income for the current year was P900,000. What amount should be reported as basic earnings per share? A.8.50 B.9.50 C.9.00 D.5.00 Answer. A. 8.50 Preference share capital (10,000 x P100) Net income. Preference dividends (1,000,000 x 5%) Net income to ordinary shares.

1,000,0 1,000,000 00 900,000 (50,000) 850,000

BASIC EARNINGS PER SHARE (850,000/100,000 ordinary shares) P8.50

Whether cumulative or noncum noncumulative ulative ulative, only one year preference dividend is deducted from net income. If cumulative, the preference dividend is deducted regardless of declaration. If noncumulative, the preference dividend is deducted only when

declared

PROB PROBLEM LEM 31-2(AICPA Adapted) Royal Company reported the ff. capital structure on Jan. 1, 2019: Shares issued and outstanding 200,000 50,000

Ordinary share capital Preference share capital.

On October 1, 2019, the entity issued a 10% share dividends on ordinary shares and declared the annual cash dividend of P200,000 on preference shares. The preference shares are noncumulative, nonparticipating and nonconvertible. Net income for the year ended December 31, 2019 was P1,920,000. What amount should be reported as basic earnings per share? A. 8.20 B. 8.72 C. 9.36 D. 7.82 Answer: D. 7.82 Ordinary shares - January 1, 2019

200,000

Share dividends on October 1, 2019(10% x 200,000)

20,000 220, 220,000 000

Total ordinary share outstanding Net income

1,920,000

Preference dividend

(200,000)

Net income to ordinary shares

1,720,00 1,720,000 0

BASIC EARNI EARNINGS NGS PER SHARE (1,720,000 / 220,000)

P7.82

Note that the preference shares are noncumulative but the l

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because it was declared during the year Otherwise, the annual preference dividend is ignor ignored ed in the absence of declaration.

PROB PROBLEM LEM 31-3 (AICPA Adapted) Ute Company had the following capital structure during 2019: Preference share capital, P10 par, 4% cumulative, 25,000 shares issued and outstanding Ordinary share capital, P5 par value, 200,000 shares issued and outstanding

250,000

1,000,000

The entity reported net income of P500,000 for the year ended December 31, 2019. The entity paid no preference dividends during 2018 and paid P16,000 preference dividends during 2019 What amount should be reported as basic earnings per share? a. 2.42 b.2.45 c. 2.48 d.2.50 Answer: b. 2.45 Net income

500,000

Preference dividend for 1 year(250,000 x 4%)

(10,000)

Net income to ordinary shares

490,000

BASIC EARNINGS PER SHARE (490,000/200,000) P2.45

PROB PROBLEM LEM 31-4 (IFRS) Smart Company reported a profit before tax of P5,800,000 and income tax expense of P1,500,000 for the current year. The entity paid during the year an ordinary dividend of P400,000 and a preference dividend of P500,000 on the preference shares. The entity had a P1,000,000 of P5 par value ordinary shares in issue. 1. What amount should be reported as basic earnings per share if the preference shares are redeemable? A. 21.50 B. 19.00 C. 8.60 D. 7.60 Answer: A. 21.50 Ordinary share outstanding (1,000,000/5)

BASIC EARNINGS PER SHARE (4,300,000/200,000)

200,000

P21.50

The preference dividend is ignored because the preference shares are redeemable and considered as financial liability. The preference dividend of P500,000 is already deducted from the net income as a finance cost. 2. What amount should be reported as basic earnings per share if the preference shares are nonr nonredeemable edeemable? A. 29.00 B. 19.00 C. 21.50 D. 16.50 Answer: B. 19.00 Net income 4,300,000 Preference dividend

(500,000)

Net income to ordinary share

3,800,000

BASIC EPS (3,800,000/200,000) P19.00 In the absence of any contrary statements, the preference shares are nonredeemable.

PROBLEM 31-5 (IAA)

On January 1, 2019, Pink Company had 200,000 ordinary shares and 100,000 4% P100 par value cumulative preference share outstanding. No dividends were declared on either the preference or ordinary shares in 2018 and 2019. On December 31, 2019, the entity declared a 100% share dividend on ordinary shares. Net income for 2019 was P7,500,000. What amount should be recorded as basic earnings per share? A.35.50 B.37.50 C.17.75 D.18.75 Answer: C. 17.75 Net income

7,500,000

Preference dividend (4% x 10,000,000)

( 400,000)

Net income to ordinary shares

7,100,000

Divided by ordinary shares

400,000

BASIC EARNINGS PER SHARE

P 17.75

Original ordinary shares

200,000

Share dividend (100%)

200,000

Total ordinary shares

400,000

The share split should be retroactively applied to the earliest period presented. N t

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the financial statements Otherwise, if the share split occurred after the issuance of the financial statements, the share split is ignored.

PROB PROBLEM LEM 31-6 (IAA) Laguna Company reported net income of P15,000,000 for the current year. The entity showed the following shareholder’s equity at year-end: Preference share capital 10% cumulative, P50 par value, 100,000 shares Ordinary share capital, P100 par value, 300,000 shares Share premium Retained earnings Treasury ordinary shares, 50,000 at cost

5,000,000

30,000,000

10,000,000 18,000,000 4,000,000

What amount should be reported as basic earnings per share? A. 58.00 B. 60.00 C. 73.60 D. 48.33 Answer: a. 58.00 Ordinary Shares issued (30,000,000 / 100 par value) Treasury shares Ordinary shares outstanding

300,000

( 50,000) 250,000

Net income

15,000,000

Preference dividend (5,000,000 x 10%)

( 500,000)

Net income to ordinary shares

14,500,000

BASIC EPS(14,500,000 / 250,000)

P58.00

Note that the numerator is net income reflecting all items including in profit or loss, such as casualty cost.

PROB PROBLEM LEM 31-7 (IFRS) On January 1, 2019, Sabina Company had ordinary share capital outstanding of P100 par value, 200,000 shares or a total par value of P20,000,000. On July 1, 2019, a bonus issue was made in the ratio of one additional ordinary share for each original share. The net income for the current year was P12,000,000. What amount should be reported as basic earnings per share? A.30 B.40 C.60 D. 20 Answer: A. 30 January 1

Ordinary shares

200,000

July 1

Bonus issue

200,000

Total ordinary shares

EARNINGS PER SHARE (12,000,000/400,000)

The bonus issue is the equivalent of a share dividend.

400,000

P30.00

PROB PROBLEM LEM 31-8 (Application Guidance PAS 33) On January 1, 2019, Gina Company had 300,000 ordinary shares outstanding, P100 par value or a total par value of P30,000,000. During 2019, the entity 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, 2019. The market value of each ordinary share immediately prior to March 31, 2019 was P160. The net income for 2019 was P6,000,000. What amount should be reported as basic earnings per share? A. 17.14 B. 16.67 C. 18.75 D. 17.39 Answer: A. 17.14 Theoretical Value of Rights Value of one rights = Mark Market et value of share right on – subscription price Number of rig rights hts to purchase one share + 1

Applying the formula for the theoretical value of rights is = 160-100 / 5+1 =60/6 =P10 per right Market value of shares-right on Theoretical Value of rights Market value of share ex-right. Adjustment factor

160 10 150 160/150

The number of ordinary shares outstanding prior to the exercise of the rights is multiplied by an adjustment factor whose

numerator is the market value of the share rights-on and the denominator is the market value of the shares ex-right.

Ordinary shares- January 1 Ordinary shares issued thru exercise of rights on March 31, 2019 (300,000 /5) Total ordinary shares on March 31

January 1

300,000 x 160/150 x 3/12

March 31

300,000 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 P17.14

PROB PROBLEM LEM 31-9 (App (Application lication Guidance PAS 33) On January 1, 2019, Excel Company had 600,000 ordinary shares outstanding. During 2019, the entity issued rights to acquire one ordinary share at P10 in the ratio of one new share for every 4 shares outstanding The rights are exercised on October 1, 2019. The market value of the ordinary share immediately prior to the rights issue is P35. The net income for the year is P8,550,000. What amount should be reported as basic earnings per share? A.11.40 B.12.00 C. 14.25 D. 13.41 Answer: B. 12.00 Applying the formula for the theoretical value of rights is = 35-10 / 4+1 =25/5 =P5 per right Market value of shares-right on Theoretical Value of rights Market value of share ex-right. Adjustment factor

35 5 30 35/30

Ordinary shares- January 1

600,000

Ordinary shares issued thru exercise of rights on October 1, 2019 (600,000 /4)

150,000

Total ordinary shares on October 1

750,000

January 1

600,000 x 35/30 x 9/12

525,000

March 31

750,000 x 3/12

187,500

Average number of shares Basic EPS ( 8,550,000 / 712,500)

712,500 P12.00

PROB PROBLEM LEM 31-10 (IAA) During the current year, Innova Company had outstanding 200,000 ordinary shares and 20,000 cumulative preference shares with a P10 par share dividend. The entity had a P3,000,000 net loss for the year. No dividends were declared or paid. What amount should be reported as basic loss per share? A. 15.00 B. 16.00 C. 10.00 D. 10.67 Answer: B. 16.00 Net loss Preference dividend (20,000 x 10) Total loss to ordinary shares

BASIC LOSS PER SHARE (3,200,000/ 200,000)

3,000,000 200,000 3,200,000

P16.00

The annual preference dividend is added to the net loss to get the total loss attributable to the ordinary shares.

CHAPTER 32 CHAPTER Basic EARNING EARNINGS S PER SHARE Aver Average age shares PROB PROBLEM LEM 32-1 (AICP (AICPA A Adapted) Jet Company provided the ff. information for the current year: January 1 April 1 July 1

Shares outstanding 2-for-1 share split Shares issued

200,000 200,000 100,000

What is the average number of shares? A. 400,000 B. 450,000 C. 500,000 D. 540,000 Answer: B. 450,000 January 1 200,000 x 2 x 12/12 July 1 100,000 x 6/12

400,000 50,000 450,000

The share split is recognized retroactively, meaning, it is treated as a change from the date of original shares are issued. Thus, the balance of 200,000 shares on January 1 would become 400,000 as a result of a 2-for-1 share split.

PROB PROBLEM LEM 32-2 (AICPA Adapted) Timp Company had the ff. transactions during the year: January 1 Ordinary shares outstanding 300,000 February 1 Issued a 10% share dividend 30,000 March 1 Issued ordinary shares in a 90,000 business combination July 1 Issued ordinary shares for cash 80,000 December 1 Ordinary shares outstanding 500,000 What is the weighted average number of shares outstanding? A. 400,000 B. 442,000 C. 445,000 D. 460,000 Answer: C. 445,000 January 1 300,000x 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 share dividend is treated as a change from the date of original shares are issued. Thus, the balance of 300,000 on January 1 would become 330,000 shares.

PROB PROBLEM LEM 32-3 (IAA) Sharon Company provided the ff. information in relation to share capital for the current year: January 1 Shares outstanding 1,250,000 April 1 Shares issued 200,000 October 1 Treasury shares purchased 100,000 December 1 Issued a 100% share dividend What is the amount of weighted average shares? A. 2,700,000 B. 2,775,000 C. 2,750,000 D. 1,350,000 Answer: C. 2,750,000 January 1 1,250,000 x 200% April 1 200,000 x 200% x 9/12 October 1 100,000 x 200% x 3/12 Average number of shares

2,500,000 300,000 (50,000) 2,750,0 2,750,000 00

PROB PROBLEM LEM 32-4 (IAA) At the beginning of the current year, Nissan Company had 200,000 ordinary shares outstanding. During the current year, the following events occured: March 1 2-for-1 share split June 1 Issued 30,000 additional shares September 1 20% share dividend What is the weighted average number of shares outstanding? A. 276,000 B. 261,000 C. 230,000 D. 256,000 Answer: B. 261,000

January 1 June 1

100 000 x 2 x 1 20 x 12/12 30,000 x 1 20 x 7/12 Average number of shares

240 000 21,000 261,00 261,000 0

PROB PROBLEM LEM 32-5 (IAA) Shane Company had 100,000 ordinary shares issued and outstanding at the beginning of the year. During the current year, the entity had the ff. ordinary shares transactions: April 1 May 1 June 30 July 31 December 31

Issued 30,000 previously unissued shares Split the share 2 for 1 Purchased 10,000 shares for the treasury Distributed a 20% share dividend Split the share 3 for 1

What is the weighted average number of shares that should be used in calculating earnings per share? A. 288,000 B. 864,000 C. 882,000 D. 972,000 Answer: B. 864,000 January 1 April 1 June 30

100,000 x 2 x 1.20 x 3 x 12/12 30,000 x 2 x 1.20 x 3 x 9/12 10,000 x 1.20 x 3 x 6/12

720,000 162,000 (18,000) 864,00 864,000 0

The January 1 balance is adjusted for the 2 for 1 split, 20% share dividend and 3 for 1 split. The April 1 issue is adjusted for 2 for 1 split, 20% share dividend and 3 for 1 share split. The June 30 treasury shares are adjusted for the 20% share dividend and 3 for 1 share split.

PROB PROBLEM LEM 32-6 (IAA) Helen Company provided the ff. share transactions for the current year: January 1 Shares outstanding 44,000 February 1 Issued for cash 56,000 May 1 Acquired treasury shares 25,000 August 1 25% share dividend September 1 Resold treasury shares 10,000 November 1 Issued 3 for 1 share split What is the weighted average number of shares for EPS computation? A. 305,000 B. 307,500 C. 103,750 D. 311,250 Answer: A. 305,000 January 1 February 1 May 1 September 1

44,000 x 1.25 x 3 x 12/12 56,000 x 1.25 x 3 x 11/12 25,000 x 1.25 x 3 x 8/12 10,000 x 3 x 4/12

165,000 192,500 (62,500) 10,000 305,000

The January 1 balance is adjusted for the 25% share dividend and 3 for 1 split. The February 1 issue is adjusted for 2 for 25% share dividend and 3 for 1 share split. The May 1 treasury shares are adjusted for the 25% share dividend and 3 for 1 share split. The September 1 resold of treasury is adjusted for the 3 for 1 split.

PROB PROBLEM LEM 32-7 (IAA) Wisconsin Company had 250,000 ordinary shares outstanding on January 1, 2019. During 2019 and 2020, the ff. transactions took place: 2019 March 1 Sold 24,000 shares July 1 Issued a 20% share dividend October 1 Sold 16,000 shares December 1 Purchased 15,000 shares to be held in treasury 2020

June 1 September 1

3 for 1 share split Sold 60,000 shares

1. What is the weighted average number of shares for 2019 to be used in the earnings per share computation for comparative financial statements of 2020? A. 980,250 B. 329,800 C. 984,000 D. 969,000 2. What is the weighted average number of shares for 2020 to be used in the earnings per share computation for comparative financial statements of 2020? A. 1,009,400 B. 1,049,400 C. 1,169,400 D. 989,400 Answer for no. 1- A. 980,250 2019 January 1 March 1

250,000 x 1.2 x 3 x 12/12 24,000 x 1.2 x 3 x 10/12

900,000 72,000

October 1 16 000 x 1 2 x 3/12 December 1 15 000 x 1 2 x 1/12

12 000 (3 750) 980,2 980,250 50

January 1, 2019 March 1, 2019 July 1, 2019 (20% x 274,000) October 1, 2019 December 1, 2019 Outstanding shares-December 31, 2019 Answer for no. 2- A. 1,009,400 2020 January 1 329,800 x 3 x 12/12 September 1 60,000 x 4/12

250,000 24,000 54,800 16,000 (15,000) 329, 329,800 800

989,400 20,000 1,009, 1,009,400 400

PROB PROBLEM LEM 32-8 Precise Company had a net income of P15,000,000 for the current year. The ff. appropriations have not been considered in this amount: Arrears of cumulative preference divided by 2 4,000,000 years Ordinary dividends 5,000,000 Preference share premium payable on redemption 1,000,000 Exceptional profit, net of tax 4,000,000 The entity had 3,000,000 ordinary shares of P1 par value outstanding at the beginning of the year. The ff. share transactions occured during the current year: January 1 Issued at P5 per share, P1 paid to date 250,000 and entitled to participate in dividends to the extent paid up April 1 Full market price P3 per share issue 600,000 July 1 Purchase of own shares 400,000 What amount should be reported as basic earnings per share? A. 4.85 B. 4.57 C. 3.64 D. 3.94 Answer: A. 4.85 Net income per book Exceptional profit Adjusted net income Preference dividend for the current year (4M/2) Preference share premium payable on

15,000,000 4,000,000 19,000,000 (2,000,000) (1,000,000)

redemption Net income to ordinary shares

16,000, 16,000,000 16 000 000

The preference share premium payable on redemption can be

considered as dividend on participating preference share. January 1 January 1 April 1 July 1

3,000,000 x 12/12 250,000 x 1/5 x 12/12 600,000 x 9/12 400,000 x 6/12 Average shares

BASIC EARNINGS PER SHARE (16,000,000/3,300,000)

3,000,000 50,000 450,000 (200,000) 3,300,000 4.85

PROB PROBLEM LEM 32-9 (AIC (AICPA PA Adapted) Strauch Company had one class of ordinary share capital outstanding and no other securities that are potentially convertible into ordinary shares. During 2019, 100,000 shares were outstanding. In 2020, two distributions of additional ordinary shares occured: April 1- 20,000 treasury shares were sold July 1- A 2-for-1 share split was issued The net income for 2020 was P4,485,000 and the net income for 2019 was P3,500,000. 1. What amount should be reported as basic earnings per share for 2020 in the comparative income statement for 2020? A. 20.50 B. 19.50 C. 22.42 D. 18.69 2. What amount should be reported as basic earnings per share for 2019 in the comparative income statement for 2020? A. 35.00 B. 17.50 C. 15.22 D. 14.28 Answer for no.1- B. 19.50 January 1, 2020 200,000 x 12/12 200,000 April 1, 2020 20,000 x 2 x 9/12 30,000 Averag Average e Shares 230,0 230,000 00 2020 Basic Earnings Per Share (4,485,000/230,000) 19.50 Answer for no.2- B.17.50 Dec 31, 2019 Balance

100,000
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