PAS 33-Earnings Per Share PDF

Preview

Summary

CHAPTER 31PAS 33- EARNINGS PER SHAREBASIC EARNINGS PER SHARESimple ProblemsPROBLEM 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...

Description

CHAPTER 31 PAS 33- EARNINGS PER SHARE BASIC EARNINGS PER SHARE Simple Problems PROBLEM 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.

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

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

PROBLEM 31-2(AICPA Adapted)

Royal Company reported the ff. capital structure on Jan. 1, 2019:

Ordinary share capital Preference share capital.

Shares issued and outstanding 200,000 50,000

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 20,000 220,000

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

Total ordinary share outstanding Net income Preference dividend Net income to ordinary shares BASIC EARNINGS PER SHARE (1,720,000 / 220,000)

1,920,000 (200,000) 1,720,000 P7.82

Note that the preference shares are noncumulative but the annual preference dividend is deducted from net income because it was declared during the year. Otherwise, the annual preference dividend is ignored in the absence of declaration. PROBLEM 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

250,000

Ordinary share capital, P5 par value, 200,000 shares issued and outstanding

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 Preference dividend for 1 year(250,000 x 4%) Net income to ordinary shares

500,000 (10,000) 490,000

BASIC EARNINGS PER SHARE (490,000/200,000)

P2.45

PROBLEM 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 nonredeemable? A. 29.00 B. 19.00 C. 21.50 D. 16.50 Answer: B. 19.00 4,300,000 Net income Preference dividend (500,000) Net income to ordinary share 3,800,000 BASIC EPS (3,800,000/200,000) In the absence of any contrary statements, the preference shares are nonredeemable.

P19.00

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 Preference dividend (4% x 10,000,000) Net income to ordinary shares Divided by ordinary shares BASIC EARNINGS PER SHARE

7,500,000 ( 400,000) 7,100,000 400,000 P 17.75

200,000 200,000 400,000

Original ordinary shares Share dividend (100%) Total ordinary shares

The share split should be retroactively applied to the earliest period presented. Note also that the share split occurred prior to the issuance of the financial statements. Otherwise, if the share split occurred after the issuance of the financial statements, the share split is ignored. PROBLEM 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

300,000 ( 50,000)

Ordinary shares outstanding Net income Preference dividend (5,000,000 x 10%) Net income to ordinary shares BASIC EPS(14,500,000 / 250,000)

250,000 15,000,000 ( 500,000) 14,500,000 P58.00

Note that the numerator is net income reflecting all items including in profit or loss, such as casualty cost. PROBLEM 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 July 1 Total ordinary shares

Ordinary shares Bonus issue

EARNINGS PER SHARE (12,000,000/400,000) The bonus issue is the equivalent of a share dividend.

200,000 200,000 400,000 P30.00

PROBLEM 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 = Market value of share right on – subscription price Number of rights 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.

160 10 150

Adjustment factor

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

360,000 80,000 270,000 350,000

Average number of shares Basic EPS ( 6,000,000 / 350,000)

300,000 60,000

P17.14

PROBLEM 31-9 (Application 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 Ordinary shares issued thru exercise of rights on October 1, 2019 (600,000 /4) Total ordinary shares on October 1

600,000 150,000

January 1

525,000

600,000 x 35/30 x 9/12

750,000

March 31 750,000 x 3/12 Average number of shares

187,500 712,500

Basic EPS ( 8,550,000 / 712,500)

P12.00

PROBLEM 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

Basic EARNINGS PER SHARE Average shares PROBLEM 32-1 (AICPA 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.

PROBLEM 32-2 (AICPA Adapted)

Timp Company had the ff. transactions during the year: January 1 Ordinary shares outstanding February 1 Issued a 10% share dividend March 1 Issued ordinary shares in a business combination July 1 Issued ordinary shares for cash December 1 Ordinary shares outstanding

300,000 30,000 90,000 80,000 500,000

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.

PROBLEM 32-3 (IAA) Sharon Company provided the ff. information in relation to share capital for the current year:

January 1 April 1 October 1 December 1

Shares outstanding Shares issued Treasury shares purchased 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

1,250,000 200,000 100,000

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

PROBLEM 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 1 100,000 x 2 x 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

PROBLEM 32-5 (IAA) Shane Company had 100,000 ordinary shares issued and outstanding at the beginning of the year....