QUESTION 1

Extracts from the statement of financial position of ABC Ltd as at 1 April 2019 are:

Extracts from the statement of financial position

of ABC Ltd as at 1 April 2019 are:
$000 $000
Ordinary shares of 25 cents each 4 000
8% Irredeemable preference shares 1 000
Reserves:
Share premium 700
Capital reserve 1 300
Revaluation reserve 90
Retained earnings 750
–––––
2 840
–––––
7 840
–––––
10% Convertible loan notes 2 000

Note: the above are extracts from the opening statement of financial position for the current
reporting year.
The following draft statement of profit or loss has been prepared for the year to 31 March
2020 prior to the declaration of the final ordinary dividend for the year:

$000 $000
Profit before interest and tax 1 800
Loan interest (200)
–––––
Profit before tax 1 600
Taxation
 − provision for 2020 300
− deferred tax 390
–––––
(690)
–––––
Profit for the year 910
–––––

The following information is relevant:

(i) Dividends declared in the year were as follows;
– Ordinary $320 000
–Preference $80 000
(ii) A bonus issue of one new share for every eight ordinary shares held was made on
7 September 2019.
(iii) A fully subscribed rights issue of one new share for every five ordinary shares held at a
price of 50 cents each was made on 1 January 2020. Immediately prior to the issue the
market price of ABC’s ordinary shares was $1.40 each.
(iv) The terms of conversion of the 10% loan notes are:

Year Loan notes Ordinary shares

2022 to 2026 $100 100
2027 $100 120

Income tax is to be taken as 33%.

(v) The earnings per share (EPS) was correctly reported in last year’s accounts at 8 cents.

Required:

(a) Calculate the earnings per share (EPS) for Radan for the year ended 31 March
2020:
(i) on a basic basis (including the comparative figure)
(ii) on a diluted basis (ignore the comparative figure)
 and state which figures need to be disclosed in the financial statements (ignore
comparatives).
(b) Explain why it is useful to disclose the EPS calculated on a diluted basis in
addition to the basic basis.

SOLUTION Q1
Earnings per share (EPS) for the year ended 31 March 2020 2019
(i) Basic basis (W1) 4.0c 6.3c
(ii) Diluted basis (W2) 4.2c
Basic earnings per share must be presented for both years. Since the diluted EPS exceeds the basic
EPS, the loan notes are non-dilutive and the diluted EPS should not be disclosed.
(W1) Basic earnings per share
- Determination of outstanding shares
Ordinary shares at 1 April 2019 (4,000/0.25) 16,000
Bonus issue of 1 for 8 2,000
––––––
18,000
Rights issue 1 for 5 3,600
––––––
Ordinary shares at 31 March 2020 21,600
 - Determination of TERP
$
Price 5 shares at $1.40 7.00
Rights issue 1 new share at 50 cents 0.50
––––––
7.50
––––––
Therefore the 6 shares have a theoretical value of $7.50/6 = $1.25 each.

- Determination of Weighted average number of shares

18,000 × 9/12 × 1.40/1.25 15,120
21,600 × 3/12 5,400
––––––
20,520
––––––

- Determination of Earnings
Earnings: $000
Profit after tax 910
Less preference dividend (80)
––––––
830
––––––

Therefore EPS is $830/20,520 × 100c = 4c

Comparative figure:
Reported in 2019, EPS 8c × 8/9 (bonus) × 1.25/1.40 (rights) restated as 6.3c
(W2) Diluted earnings per share
Assuming the greatest dilution, the 10% loan notes will be converted to
($2,000 × 120/100) 2,400 ordinary shares
The effect on earnings will be the interest saved net of tax $2,000 × 10% ×
(100 − 33)% = $134
Therefore EPS is (830 + 134)/(20,520 + 2,400) × 100c = 4.2c