Part A:

(1) Diluted Earning per share:

Diluted earning per share is the calculation of a company earning per share after considering
the exercise of all convertible securities. Diluted earnings per share assumes that all convertible
securities, bond and other instruments are actual common stock or shares and calculate
earning per share using these convertible stocks as common stock.
Importance of diluted earning per share for companies:
Companies are required to report diluted earning per share because it will provide information
to shareholders about the return in worst condition of the company as it take into accounts all
convertible securities as common shares.
It is more important for those companies which has a lot number of convertible securities,
bonds and other instruments. These companies shareholder will be more interested in diluted
earning per share rather than basic earning per share because of providing information in the
worst condition of the company.
2(a)Fair value:
Yes the use of fair value will provide us more relevant accounting information of valuation of
debt instruments as fair value take information of current market condition to value such
instruments.it is a reference to estimate worth of a debt instrument that are recorded on
company financial statements.
The use of fair value to account debt will provide more relevant accounting information
because fair value take in to account the value or expected price of a debt instruments and
taking into account supply, utility and demand for it. Using fair value the financial statements
will be automatically adjusted for any changes in the valuation of debt instruments in the
market condition.
Using fair value for debt we will be able to know the actual value of debt and liability.it will help
us in raising funds through debt instruments as we will be able to that how much value of as
debt instruments is right to issue at.
2(b)Disadvantages of fair value:
The main disadvantages of fair value of accounting is value reversal and adverse market effect.
As when we consider the unfavorable market condition in the valuation of assets or liabilities
using fair value and the market condition changes in near future then we have to reverse such
valuation which is costly and time consuming.
Part B:
Basic Earning per share calculation for 2019 of AL Rihab company:
We will use the following formula to calculate the Earning per share:
Earning per share = Net income/weighted average no. of shares
To calculate weighted number of share we will taking all number of outstanding shares at year
end and multiply with the period time, we have calculated the weighted number of shares as
follows:

Particulars No. of shares period of holding weighted No. of shares

shares at beginning 2900000 12/12 2900000
preference share 300000 8/12 200000
Bond A converted 200000 3/12 50000
Stock Dividend Issued (2900000*15%) 500000 10/12 416666
Stock Split (3400000*(3-1)) 6800000 9/12 5100000
weighted no of share     8666666

So Basis Eps would be = Net income/weighted average no. of shares

=18000000/86666666
=2.07

Diluted Earnings per share for 2019 of Al rihab company:

The diluted earnings per share is calculated using the following formula:
Diluted Earning per share = Diluted income/Diluted no. of shares
Diluted income:
The diluted income is calculated considering the impacts of preference dividend and interest
payments. Any preference dividend and interest paid will be added back to net income to
calculate diluted income. The diluted income is calculated as below:

Net income 18000000

Preferred dividend
NO. of outstanding preference
shares 7500000/3=2500000-300000-300000=1900000
 Preference dividend 1900000*3*8%*8/12=304000

Interest expense Bond A 1000000*0.6*0.06=36000

Interest expense Bond B 6000000*8*3/12=120000

Diluted Income 18460000

Diluted numbers of shares:

The diluted numbers of shares is calculated by considering as all of the preference shares and
convertible securities as common shares. The diluted no. of shares is calculated as follows:

weighted average no. of share

$ 8,666,666.00
common share
$ 5,700,000.00
Convertible preference share (1900000*3)
$ 300,000.00
Convertible Bond A if Converted (500000*.6)
$ 100,000.00
Convertible Bond B if Converted (50000000/1000*2)
$ 30,000.00
Additional Shares if Options issued (120000*(25-20))/20
$ 14,796,666.00
Diluted no. of share

So the Diluted earnings per share is:

Diluted Earnings per share = Diluted income/Diluted no. of shares
=18460000/14796666
=1.24

Part c:
Basic Earning per share calculation after adjustments:
The error made by the previous accountant has to be adjusted as it was not In accordance with
international accounting standards