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Basic Earnings Per Share
Basic Earnings Per Share
Simple problems
a. 8.50
b. 9.50
c. 9.00
d. 5.00
Whether cumulative or noncumulative, only one year, preference dividend is deducted from net income.
On October 1, 2018, the entity issued a 10% stock dividend on ordinary shares and declared the annual cash
dividend of P200,000 on preference shares.
Net income for the year ended December 31, 2018 was P1,920,000.
Note that the preference shares are noncumulative, but the annual preference dividend is deducted from net income
because it was declared during the year.
Ube Company had the following capital structure during 2017 and 2018:
The entity reported net income of P500,000 for the year ended December 31, 2018.
The entity paid no preference dividends during 2017 and paid P16,000 in preference dividends during 2018.
a. 2.42
b. 2.45
c. 2.48
d. 2.50
Smart Company reported profit before tax of P5,800,000 and income tax expense of P1,500,000 for the current year.
In addition, the entity paid during the year an ordinary dividend of P400,000 and a preference dividend of P500,000
on the redeemable preferences shares.
a. 21.50
b. 19.00
c. 8.60
d. 7.60
2. What amount should be reported as basic earnings per share assuming the preference shares are
nonredeemable?
a. 29.00
b. 19.00
c. 21.50
d. 16.50
Solution 31-4
Question 1 Answer a
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.
Question 2 Answer b
On January1, 2018, Pink Company had 200,000 ordinary shares and 100,000 4% P100 par value cumulative
preference shares outstanding.
No dividends were declared on either the preference or ordinary shares in 2017 or 2018
On March 1, 2019, prior to the issuance of the financial statements for the year ended December 31,2018, the entity
declared a 100% share dividend on ordinary shares.
a. 35.50
b. 37.50
c. 17.75
d. 18.75
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.
Laguna Company reported net income of P15,000,000 for the current year. The net income reflects an income tax
rate of 30%.
The next net income included a casualty loss of P5,000,000 before income tax.
Preference share capital 10% cumulative, P50 par value, 100,000 shares 5,000,000
Ordinary share capital, P100 par value 30,000,000
Share premium 10,000,000
Retained earnings 18,000,000
Treasury ordinary shares, 50,000, at cost 4,000,000
a. 58.00
b. 60.00
c. 73.60
d. 48.33
Solution 31-6 Answer a
Note that the numerator is net income reflecting all items included in profit or loss, such as casualty loss.
On January 1, 2018, 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, 2018, 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
a. 30
b. 40
c. 20
d. 60
On January 1, 2018, Gina Company had 300,000 ordinary shares outstanding, P100 par or a total par value of
P30,000,000.
During 2018, 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, 2018. The market value of each ordinary share immediately prior to march
31, 2018 was P160. The net income for 2018 was P6,000,000.
a. 17.14
b. 16.67
c. 18.75
d. 17.39
160-100 60
= = P10 per right
5+1 6
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 right-on and whose denominator is the market value of the share
ex-right.
Excel Company had 600,000 ordinary shares outstanding on January 1, 2018. During 2018, the entity 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, 2018.
a. 11.40
b. 12.00
c. 14.25
d. 13.41
35-10
Theoretical value of right =
4+1
= 5
The entity had a P3,000,000 net loss for the year. No dividends were paid or declared.
a. 15.00
b. 16.00
c. 10.00
d. 10.67
The annual preference dividend is added to the net loss to get the total loss attribute to the ordinary shares
QUESTION 60-11 Multiple choice (PAS 33)
1. Earnings per share shall be calculated before accounting for which of the following?
a. Preference dividend for the period
b. Ordinary dividend
c. Taxation
d. Minority interest
2. If a bonus occurs between the year-end and the date that the financial statements are authorized for issue
a. The EPS for both the current and the previous year is adjusted
b. The EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted
3. If a new issue of shares for cash is made between the year-end and the date that the financial statements are
authorized for issue
a. The EPS for both the current and the previous year is adjusted
b. The EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted
4. The weighted average number of shares outstanding during the period for all periods other than the
conversion of potential ordinary shares should be adjusted for
a. Any change in the number of ordinary shares without a change in resources
b. Any prior period adjustment
c. Any new issue of shares for cash
d. Any convertible instruments settled in cash
5. Which figure for earnings does EPS information use?
a. Profit attributable to ordinary equity holder and preference shareholders of the parent
b. Profit before taxation
c. Profit from operations
d. Profit attributable to ordinary equity holders of the parent
6. Ordinary shares issued as part of a business combination are included in the EPS calculation from
a. The beginning of the accounting period.
b. The date of acquisition
c. The end of the accounting period.
d. The midpoint of the accounting year.
7. Shares which are issued to settle a liability are included in the EPS calculation from
a. Date of the contract for services
b. Halfway through the rendering of services
c. The completion of services
d. The settlement date
8. Shares which are to be issued upon the conversion of a mandatorily convertible instrument upon the
conversion of a mandatorily convertible instrument are included in the calculation of basic earnings per
share from
a. The date of the contract for the shares
b. Halfway through the period
c. The date of conversion
d. The issue of the share certificate
9. Under IFRS, where ordinary shares are issued but not fully paid, the ordinary shares are treated in the
calculation of basic EPS
a. In the same way as fully paid ordinary shares.
b. As a fraction of an ordinary share to the extent that the shares are entitled to participate in
dividends.
c. In the same way as warrants or options and are included only in diluted EPS.
d. Are ignored.
1. Where in the financial statements should basic and diluted EPS be reported?
a. In the accompanying notes
b. In management discussion and analysis
c. In the income statement
d. In the statement of cash flows
2. An entity that reports a discontinued operation shall present basic and diluted earnings per share for the
discontinued operation
a. Only on the face of the income statement.
b. Only in the notes to the financial statements.
c. Either on the face of the income statement or in the notes to financial statements.
d. Only if the management chooses to do so.
3. What is the correct treatment of a share dividend issued in mid-year when computing the weighted average
number of ordinary shares outstanding for earnings per share purposes?
a. The share dividend should be weighted by the length of time that the additional shares are
outstanding during the period.
b. The share dividend should be included in the weighted average number of shares outstanding only if
the additional shares result in a decrease of three percent or more in earnings per share.
c. The share dividend should be weighted as if the additional shares were issued at the beginning
of the year.
d. The share dividend should be ignored since no additional capital was received.
4. In the computation of weighted average number of shares outstanding when there is a share split, the
additional shares are
a. Weighted by the number of days outstanding.
b. Weighted by the number of months outstanding.
c. Considered outstanding at the beginning of the year
d. Considered outstanding at the beginning of the earliest year reported
5. Earnings per share should be computed on the basis of
a. Preference shares
b. Voting ordinary share
c. Voting and nonvoting ordinary shares
d. Voting ordinary share and participating preference shares
6. Undeclared preference dividends are deducted from net income in the earnings per share computation for
which type of preference shares?
a. Noncumulative
b. Cumulative
c. Neither cumulative nor noncumulative
d. Both cumulative and noncumulative
7. Earnings per share should always be reported for
a. Gross profit
b. Income before tax
c. Income from continuing operations
d. Prior period error
CHAPTER 32
BASIC EARNINGS PER SHARE
Average Shares
The share split is recognized retroactively, meaning, it is treated as a change from the date the 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 32-5
Shane Company had 100,000 ordinary shares issued and outstanding at the beginning of current year.
During the current year, the entity had the following ordinary share transactions:
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
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 the 2 for 1 split, 20% share dividend and 3 for 1 split.
The June 30 treasury shares are adjusted for the 20% share dividend and 3 for 1 split.
The January 1 balance is adjusted for the 25% share dividend and 3 for 1 split.
The February 1 issue is adjusted for the 25% share dividend and 3 for 1 split.
The May 1 treasury shares are adjusted for the 25% share dividend and 3 for 1 split.
The September 1 resale of treasury is adjusted for the 3 for 1 split.
2018:
March 1 Sold 24,000 shares
July 1 Issued a 20% shares dividend
October 1 Sold 16,000 shares
December 1 Purchased 15,000 shares to be held in treasury
2019:
June 1 3 for 1 share split
September 1 Sold 60,000 shares
1. What is the weighted average number of shares for 2018 to be used in the earnings per share computation
for comparative financial statements of 2019?
a. 980,250
b. 329,800
c. 984,000
d. 969,000
2. What is the weighted number of shares for 2019 to be used in the earnings per share computation for
comparative financial statements of 2019?
a. 1,009,400
b. 1,049,400
c. 1,169,400
d. 989,400
Solution 32-7
Question 1 Answer a
2018
January 1 (250,000 x 1.20 x 3 x 12/12) 900,000
March 1 (24,000 x 1.20 x 3 x 10/12) 72,000
October 1 (16,000 x 3 x 3/12) 12,000
December 1 (15,000 x 3 x 1/12) (3,750)
980,250
2019
January 1 (329,800 x 3 x 12/12) 989,400
September 1 (60,000 x 4/12) 20,000
1,009,400
The entity had 3,000,000 ordinary shares of P1 par value outstanding at the beginning of the year. The following
share transactions occurred during the current year:
The preference share premium payable on redemption can be considered as dividend on participating preference
share.
The net income for 2019 was P4,100,000 and the net income for 2018 was P3,500,000.
1. What amount should be reported as basic earnings per share for 2019 in the comparative income statement
for 2019?
a. 20.50
b. 17.83
c. 23.43
d. 17.08
2. What amount should be reported as basic earnings per share for 2018 in the comparative income statement
for 2019?
a. 35.00
b. 17.50
c. 15.22
d. 14.58
Solution:
Question 1 Answer B
Question 2 Answer B
1. What amount should be reported as basic earnings per share for 2018 for presentation in comparative
financial statements on December 31, 2019?
a. 15.88
b. 20.00
c. 20.80
d. 19.90
2. What amount should be reported as basic earnings per share for 2019 for presentation in comparative
financial statements on December 31, 2019?
a. 24.10
b. 19.28
c. 30.77
d. 32.00
Solution
Question 1 Answer B
2018
Question 2 Answer B
2018
Jan. 1 Outstanding 100,000
Mar. 1 treasury shares purchased (3,000)
Sept. 1 Resale of treasury shares 3,000
Dec. 1 new issue 66,000
Outstanding shares – December 31, 2018 166,000
Average shares outstanding for 2019 (166,000x1.25) 207,500
QUESTIONS:
Question 60-1
Answer:
The term Earnings per share means the amount expected to be received by a shareholder each year as a
return on investment.
It is the amount if income attributable to each ordinary share. Thus, the EPS information pertains only to ordinary
share. It is not necessary for preference share because there is a definite rate of return if such share.
The presentation of EPS is required for entities whose ordinary shares or potential ordinary shares are publicly
traded and for entities that are in the process of issuing ordinary shares or potential ordinary shares in the public
securities market.
An entity shall present on the face of the income statement basic and diluted earnings per share for incoe or loss
from continuing operations.
As entity that reports a discontinued operation shall disclose the basic and diluted amounts per share for the
discontinued operation either on the face of the income statement of in the notes to the statements.
When an entity presents both consolidated financial statements and separate financial statements, the disclosures
require need be presented only on the basis of the consolidated information.
Question 60-2
Answer
The earnings should be the net income after deducting the annual preference dividend
The annual cumulative preference dividend is deducted form net income, whether such dividend is declared or not,
while noncumulative preference dividend is deducted from net income only when declared.
The ordinary shares outstanding should be the weighted average ordinary shares outstanding.
Question 60-3
Answer
Under Application Guidance 15 of IFRS 33, subscribed ordinary shares or partly paid ordinary shares are included
in EPS to the extend that they are entitled to participate in dividends.
Under the Philippine Corporation Code, subscribed shares are entitled to participate fully in dividends.
Thus, the full subscribed shares are included in EPS computation under Philippine Jurisdiction.
Question 60-4
Answer
A Potential ordinary share is a financial instrument or other contract that may entitle the holder to ordinary
shares.
In other words, a potential ordinary share is a financial instrument that represents future issuance of ordinary
shares.
Question 60-5
Answer
Dilution arises when the inclusion of the potential ordinary shares decreases the basic earnings per share or
increases the basic loss per share.
On the other hand, antidilution arises when the inclusion of the potential ordinary shares increases basic
earning per share or decreases basic loss per share
In this case, the potential ordinary shares are considered as antidilutive and therefore ignored in computing diluted
earnings per share