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Maria Claudine B. Fortaliza. CHAPTER 30 DILUTED EARNINGS PER SHARE Convertible preference shares Convertible bonds payable 1. (AICPA ADAPTED) Cox Company had 1,200,000 ordinary shares outstanding on January 1 and December 31, 2015. In connection with the acquisition of a subsidiary in June 2014, the...

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Maria Claudine B. Fortaliza. CHAPTER 30 DILUTED EARNINGS PER SHARE Convertible preference shares Convertible bonds payable 1. (AICPA ADAPTED) Cox Company had 1,200,000 ordinary shares outstanding on January 1 and December 31, 2015. In connection with the acquisition of a subsidiary in June 2014, the entity is required to issue 50,000 additional ordinary shares on July 1, 2016 to the former owners of the subsidiary. The entity paid P200,000 annual preference dividend in 2015 and reported net income of P3,400,000 for the year. The preference share capital is noncumulative and nonconvertible? What amount should be reports as diluted earnings per share? a. 2.83 b. 2.72 c. 2.67 d. 2.56 Solution: Answer D Ordinary shares outstanding

1,200,000

Potential ordinary shares to be issued in the acquisition of subsidiary

50,000

Total ordinary shares

1,250,000

Net income

3,400,000

Preference dividend

(200,000)

Net income to ordinary shares

3,200,000

Diluted earnings per share

(3,200,000 / 1,250,000)

2.56

2. (AICPA Adapted) Dunn Company had 200,000 ordinary 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, 2015. Each preference share is convertible into 5 ordinary shares. The net income for the current year was P840, 000. What amount should be reported as diluted earnings per share? a. 2.40 b. 2.80 c. 3.60 d. 4.20 Solution: Answer B Ordinary shares outstanding

200,000

Potential ordinary shares to be issued for conversion of preference shares (20,000 x 5)

100,000

Total ordinary shares

300,000

Diluted EPS (840,000 / 300,000)

2.80

3. (IAA) Vios Company had 100,000 ordinary shares outstanding on January 1, 2015. In addition, on January 1, 2015, the entity had issued 10,000 convertible cumulative 5% preference shares with P100 par. These preference shares were converted on September 1,2015. Each preference share was converted into six ordinary shares. The preference dividends for the entire year were paid in full before the conversion. The entity has no other potentially diluted securities. Net income for the current year was P2, 000,000.

What amount should be reported as diluted earnings per share? a. 12.50 b. 12.19 c. 16.25 d. 19.50 Solution: 3 Answer A January

1

Outstanding

100,000

September

1

Conversion (100,000x 6)

60,000

Total ordinary shares

160,000

Diluted EPS

12.50

(2,000,000 / 160,000)

4. (AICPA Adapted) On January 1, 2015, Lex Company had 600,000 ordinary shares outstanding. On April 1, 2015, an additional 180,000 ordinary shares were issued for cash. The entity also had P5,000,000 of 8% convertible bonds outstanding during 2015, which are convertible into 150,000 ordinary shares. The bonds are diluted in the 2015 earnings per share computation. No bonds were issued or converted into ordinary shares during 2015. What is the number of shares that should be used in computing diluted earnings per share? a. 735,000 b. 780,000 c. 885,000 d. 930,000

Solution: Answer C Ordinary shares outstanding on January 1

600,000

Ordinary shares issued on April 1 (180,000 x 9/12)

135,000

Potential ordinary shares to be issued for bond conversion

150,000

Total ordinary shares

885,000

5. (AICPA Adapted) Petrock Company provided the following information at year-end: 2014 Ordinary share capital Convertible preference share capital

90.000 shares 10,000 shares

2015 90,000 shares 10,000 shares

During 2015, Petrock paid dividends of P1.00 per ordinary share and P2.40 per preference share. The preference share capital is convertible into 20,000 ordinary shares. The net income for 2015 was P285, 000. The income tax rate was 30%. What amount should be reported as diluted earnings per share for 2015? a. 2.53 b. 2.61 c. 2.90 d. 2.59 Solution: Answer D Net income

285,000

Preference dividends (10,000 x 2.40)

(24,000)

Net income - ordinary

261,000

Basic EPS ( 261,000 / 90,000 )

2.90

Ordinary shares outstanding

90,000

Potential ordinary shares- convertible preference

20,000

Total ordinary shares Diluted EPS (285,000 / 110,000)

110,000 2.59

6. (IAA) On January 1, 2015, Frown Company had 2,000,000 ordinary shares outstanding. On July 1, 2015, the entity issued 500,000 preference shares which were convertible into 300,000 ordinary shares. During the year, the entity declared and paid P1,000,000 cash dividend on the ordinary shares and P800,000 cash dividend on the preference shares. The net income for the current year was P6,500,000. 1. What amount should be reported as basic earnings per share? a. 2.85 b. 3.25 c. 2.35 d. 2.25 2. What amount should be reported as diluted earnings per share? a. 2.85 b. 3.02 c. 2.83 d. 1.75 Solution: #1 Answer A Net income

6,500,000

Preference dividend

(800,000)

Net income - ordinary

5,700,000

Basic EPS (5,700,000 / 2,000,000)

2.85

Solution: #2 Answers A January

1-

Share outstanding

2,000,000

July

1-

Potential ordinary shares (300,000 x 6/12)

150,000

Average ordinary shares

2,150,000

Diluted EPS (6,500,000 / 2,150,000)

3.02

The effect of the convertible preference shares is increase in EPS and therefore untidilutive. Thus, the diluted EPS should the same as basic EPS of P2.85

7. (AICPA Adapted) On June 30, 2014, Lomond C ompany issued 20, P10,000, 7% bonds at face value. Each bond was convertible into 200 ordinary shares. On January 1, 2015, 10,000 ordinary shares were outstanding. The bondholders converted all the bonds on July 1, 2015. The net income for the current year was P35,000. The tax rate is 30%. What amount should be reported as diluted earnings per share? a. 2.50 b. 2.85 c. 2.92 d. 3.00 Solution: Answer B Ordinary shares outstanding

10,000

bond conversion on July 1 (20x200)

4,000

Total ordinary shares

14,000

Net income

35,000

Interest on bonds from January 1 to July 1,2015 (200,000 x 7% x 6/12)

4,900

Adjusted income Diluted earnings per share

39,900 (39,900 / 14,000)

2.85

8. (IAA) On January 1, 2015, Kate Company had 500,000 ordinary shares outstanding. On October 1, 2015, an additional 100,000 ordinary shares were issued. In addition, the entity had P20, 000,000 of 6% convertible bonds outstanding on January 1, 2015 which are convertible into 225,000 ordinary shares. No bonds were converted in 2015. The net income for the current year was P6, 000,000. The tax rate is 30%. What amount should be reported as diluted earnings per share? a. 10.00 b. 9.60 c. 9.12 d. 8.00 Solution: Answer C Ordinary shares outstanding on January 1

500,000

Ordinary shares issued on October 1 (100,000 x 3/12)

25,000

Potential ordinary shares for bond conversion

225,000

Average ordinary shares

750,000

Net income

6,000,000

Interest on bonds (6% x 20,000,000 x 70%)

840,000

Adjusted net income

6,840,000

Diluted EPS (6,840,000 / 750,000)

9.12

9. (AICPA Adapted) Bacoor Company had 2,500,000 ordinary shares outstanding on January 1, 2015. An additional 500,000 ordinary shares were issued on April 1, 2015, and 250,000 more on July 1, 2015. On October 1, 2015, the entity issued 5,000, P1,000 face value, 7% convertible bonds. Each bond is convertible into 40 ordinary shares. No bonds were converted into ordinary shares in 2015. 1. What is the number of shares that should be used in computing basic earnings per share? a. 3,000,000 b. 2,875,000 c. 2,925,000 d. 3,200,000 2. What is the number of shares that should be used in computing diluted earnings per share? a. 2,500,000 b. 3,050,000 c. 2,625,000 d. 3,250,000 Solution: #1 Answer A January

1

(2,500,000 x 12/12)

2,500,000

April

1

(500,000 x 9/12 )

375,000

July

1

(250,000 x 6/12)

125,000

Average shares - Basic EPS

3,000,000

Solution: #2 Answers B January

1

2,500,000

April

1

375,000

July

1

125,000

October

1

50,000

Average shares - Diluted EPS

3,050,000

10. (IAA) Fortuner Company had 200,000 ordinary shares outstanding on January 1, 2015, the entity had issued 4,000 convertible 10% bonds with P1, 000 face value. The bonds were converted on October 1, 2015 and 40 ordinary shares were issued in exchanged for each bond. Net income was P5, 000,000. the income tax rate is 30%. 1. What is the amount of basic earnings per share? a. 25.00 b. 13.80 c. 20.83 d. 15.62 2. What is the amount of diluted earnings per share? a. 14.47 b. 21.65 c. 14.72 d. 14.61 Solution: #1 Answer C January October

1 1

Outstanding

Conversion (4,000 x 40 x 3/12)

200,000 40,000

Average number of shares

240,000

Basic EPS

(5,000,000 / 240,000)

20.83

January

1

200,000

October

1

Outstanding

Conversion (4,000 x 40)

Total ordinary shares

160,000 360,000

Net Income

5,000,000

Interest on bonds net of tax from January 1 to October 1 (4,000,000 x 10% x 9/12 x 70%) Adjusted income Diluted EPS

210,000 5,210,000

(5,210,000 / 360,000)

14.47

11. (IAA) Atlantic Company had the following capital on January 1, 2015. 8,000,000 Ordinary share capital, P10 par value, 800,000 shares 12% convertible bonds, each P1, 000 bond is convertible into 80 5,000,000 ordinary shares May

1

Issued 60,000 ordinary shares for P30 per share

July

1

purchased 100,000shares of treasury at P35 per share

Oct.

1

Converted P2, 000,000 face value of bonds

Dec. 1

Net income for 2015 was P9, 500,000. The tax rate is 30%

1. What is the amount of basic earnings per share? a. 11.45 b. 11.88 c. 10.33 d. 10.80 2. What is the amount of diluted earnings per share? a. 8.30 b. 8.44 c. 8.33 d. 8.48

Solution: #1 Answer A January

1

Outstanding

800,000

May

1

(60000 x 8/12)

40,000

July

1

(100,000 x 6/12)

(50,000)

October

1

(2,000 x 80 x 3/12)

40,000

Average number of shares

830,000

Basic earnings per share

11.45

Solution: #2 Answers A January

1

Outstanding

800,000

May

1

(5000 bonds x 80)

400,000

July

1

(60,000 x 8/12)

40,000

October

1

(100,000 x 6/12)

(50,000)

Average number of shares

1,190,000

Net income

9,500,000

Interest on bonds actually converted on October 1 (2,000,000 x 12% x 9/12)

180,000

Interest on bonds not converted (3,000,000 x 12% )

360,000

Total interest

540,000

Tax effect (30% x 540,000)

(162,000)

378,000

Adjusted income Diluted earnings per share

9,878,000 (9,878,000 / 1,190,000)

8.30

12. (IFRS) At the beginning of the current year, Bergen Company issued 4,000,000 convertible bonds at face value of P10 or a total of P40,000,000. 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 bonds 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 for a similar debt without conversion rights is 10% and the market value of share is P4. The profit attributable to ordinary shareholders for the current year is P33, 000,000 and there are 10,000,000 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

30,000,000

Equity component

10,000,000

Total proceeds

40,000,000

What amount should be reported as diluted earnings per share? a. 2.00 b. 1.95 c. 3.30 d. 3.51 Solution: Answer B Net income

33,000,000

interest on bonds (10% x 30,000,000 x 70%)

2,100,000

Adjusted income

35,100,000

Ordinary shares outstanding

10,000,000

Potential ordinary shares from bond conversion (4,000,000 x 2)

8,000,000

Total ordinary shares Diluted earnings per share

18,000,000 (35,100,000 / 18,000,000)

1.95

13. Accenture Company had made a net profit attributable to ordinary shareholders of P2, 000,000 for the year ended December 31, 2015. There are 100,000 ordinary shares outstanding during the entire year. Since January 1, 2015, there has been P800,000 of 5% convertible loan in issue. The terms of conversion are for every P10,000 nominal amount as follows: June 30, 2015

120 ordinary shares

June 30, 2016

150 ordinary shares

June 30, 2017

140 ordinary shares

No conversion is taken place during the current year. The interest on the convertible loan is allowable for a tax relief of 30%. What amount should be reported as diluted earnings per share for the year ended December 31, 2015? a. 18.11 b. 17.86 c. 18.21 d. 18.24

Solution: Answer A Net income

2,000,000

interest on bonds (800,000 x 5 % x 70%)

28,000

Adjusted income

2,028,000

Ordinary shares outstanding

100,000

Potential ordinary shares through conversion of bonds

On most favorable terms (800,000 / 10,000 x 150)

12,000

Total ordinary shares

112,000

Diluted earnings per share

(2,028,000 / 112,000)

18.11

14. (AICPA ADAPTED) Riselle Company is calculating earnings per share for inclusion in the annual report to shareholders. Riselle Company has obtained the following information from the controller’s office: Net income from January 1 to Dec. 1

125,000

Number of outstanding per share: January 1 to March 31

15,000

April 1 to May 31

12,000

June 1 to December 31

18,000

In addition, Riselle has issued 10,000 incentive share options with an exercise price of P30 to its employees and a year-end market price of p25 per share. What is the amount of diluted earnings per share? a. 4.63 b. 4.85 c. 6.94 d. 7.69 Solution: Answer D January 1 to March 31 (15,000 x 3/12)

3,750

April 1 to May 31

2,000

(12,000 x 2/12)

June 1 to December 31 (18,000 x 7/12)

10,500

Weighted average share outstanding

16,250

Diluted EPS

7.69

15. (IFRS)

(125,000 / 16,250)

Mount Banahaw Company had outstanding 20,000 written put options on its ordinary shares with an exercise price of P350. The average market price of ordinary shares for the period is P280. In calculating diluted earnings per share, how many potential ordinary shares should be included as a result of the written put option? a. 20,000 b. 25,000 c. 5,000 d. 0 Exercise price (20,000 x P350)

7,000,000

It is assumed that sufficient number of ordinary shares shall be issue at the average market price to cover the amount of P 7,000,000. Ordinary shares assumed to be issued (7,000,000 / P280)

25,000

Ordinary shares to be repurchased under the Written put options

20,000

Potential ordinary shares

5, 000...