ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4517

CPA Review Batch 45  May 2023 CPA Licensure Examination

FINANCIAL ACCOUNTING & REPORTING / AUDITING PRACTICE S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

EPS & BOOK VALUE PER SHARE

IAS 33 – EARNINGS PER SHARE (EPS)
This standard applies to:
• Entities whose ordinary shares or potential ordinary shares are publicly traded or that are in the process
of issuing shares in the public markets.
• Entities who voluntarily choose to disclose EPS information.
Presentation in the Financial Statements
• IAS 33 requires a dual presentation of the Basic and Diluted earnings per share on the Statement of
Comprehensive Income with Equal Prominence.
• If the entity reports a Discontinued Operations, both Basic and Diluted Earnings per share should be
reported for discontinued operations.
• An entity should report both Basic and Diluted earnings per share even if it is a Loss per share.

BASIC EARNINGS PER SHARE

• Basic earnings per share is calculated by dividing the profit or loss for the period attributable to ORDINARY
shareholders by the Weighted Average number of Ordinary Shares Outstanding during the period.
• The Profit or Loss for the period attributable to ORDINARY shareholders should be the profit or loss for
the period after deducting dividends on the Preference shares.
• If the preference shares are NON-CUMULATIVE – deduct the preference dividends declared only during
the current period.
• If the preference shares are CUMULATIVE – deduct the Full amount of preference dividends for the current
period, whether declared or not.
• When Bonus issue or Share dividend and Share split are declared during the period, additional shares are
considered outstanding at the beginning of the earliest year or at the date of the issuance of the related
shares whichever comes later.

DILUTED EARNINGS PER SHARE

• Diluted earnings per share is computed similar to the computation of Basic earnings per share except that
the profit attributable to Ordinary shareholders and the Weighted Average number of Ordinary Shares
Outstanding should be adjusted for the effects of all dilutive Potential Ordinary Shares.
• The profit for the period attributable to Ordinary shares is Increased by the After-Tax amount of Interest
and dividends recognized in the period in respect of the dilutive Potential Ordinary Shares and adjusted
for any other changes in income and expense that would result from the conversion of the dilutive
potential ordinary shares.
• The Weighted Average number of Ordinary Shares Outstanding is Increased by the Weighted Average
number of additional Ordinary Shares which would have been outstanding assuming the conversion of all
Dilutive Potential Ordinary shares.

Potential Ordinary Shares – Financial instruments or other contracts that give the holder the right to acquire
Ordinary shares at a specified price for a given period.
• Common examples of potential ordinary shares are CONVERTIBLE Preference shares, CONVERTIBLE
Bonds and Options and Warrants.
• Potential ordinary shares should be treated as Dilutive when, and only when, their conversion to Ordinary
shares would Decrease net income per share.
• Potential ordinary shares are Anti-Dilutive when their conversion to ordinary shares would Increase
earnings per share or Decrease loss per share.
• The effects of anti-dilutive potential ordinary shares are ignored in calculating Diluted earnings per share.
• Potential ordinary shares in the form of share warrants and options are considered Dilutive when the
Exercise price is less than the Average Market Price.
Multiple Potential Ordinary Shares
• When there are multiple potential ordinary shares (i.e., more than one), each issue or series of
Potential Ordinary Shares is considered separately.
• To maximize dilution, each issue is considered in sequence from the Most dilutive to the Least dilutive.
• The potential ordinary share that has the least Earnings per Incremental Share is considered the
Most dilutive.

Required Disclosure
1. The amounts used as the numerators in calculating basic and diluted earnings per share, and a
reconciliation of those amounts to profit or loss attributable to the parent entity for the period
2. The weighted average number of ordinary shares used as the denominator in calculating basic and diluted
earnings per share, and a reconciliation of these denominators to each other.
3. The instruments that could potentially dilute the basic earnings per share in the future, but were not
included in the calculation of diluted earnings per share because they are anti-dilutive of the period(s)
presented.
4. The description of ordinary share transactions or potential ordinary share transactions that occurred after
the balance sheet date and that would have changed significantly the number of ordinary shares or
potential ordinary shares outstanding at the end of the period if those transactions had occurred before
the end of the reporting period.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4517
BOOK VALUE PER SHARE AND EARNINGS PER SHARE

BOOK VALUE PER SHARE – amount that would be paid on each share assuming the entity is liquidated and the
amount available to shareholders is exactly the amount reported as shareholders’ equity.
Formula:
Book value per share = Total Shareholders’ Equity  Outstanding Shares
• In the absence of any information, Preference share is assumed to be NONCUMULATIVE and
NONPARTICIPATING.
• Preference dividends in arrears usually include the Current dividends.
• Preference dividends in arrears in prior years shall be specifically disclosed, otherwise, there are no
arrearages.
• If only ONE preference share is participating, the rate of the participating preference share shall be used
as basis for ordinary share dividend.
• If there are TWO classes of preference share with different dividend rates and both are participating, the
LOWER rate shall be the basis for allocation to the ordinary share.
• For the purpose of computing the number of outstanding shares, the number of subscribed shares shall
be added to the issued shares and the number of treasury shares shall be deducted from the issued
shares.

FINANCIAL ACCOUNTING & REPORTING - THEORIES

1. Earnings per share should be computed based on
a. Number of ordinary shares outstanding at the beginning of the year.
b. Number of ordinary shares outstanding at the end of the year.
c. Weighted average number of ordinary shares outstanding during the year.
d. Weighted average number or ordinary and preference shares outstanding during the year.
2. What is the proper treatment of dividends on noncumulative preference shares in the calculation of earnings
per share?
a. Deducted from net income, when declared only
b. Deducted from net income whether declared or not
c. Added to net income, when declared only
d. Added to net income whether declared or not
3. The following are examples of potential ordinary shares, except
a. Convertible preference shares c. Stock options
b. Convertible bonds d. Stock dividends
4. In computing the basic EPS, the numerator used is the
a. Income before interests and taxes
b. Income available to ordinary shares
c. Income available to ordinary and preference shares
d. Income after interest and taxes but before preference dividends
5. In the computation of diluted earnings per share, interest expense on convertible bonds should be
a. Added back to net income at the gross amount
b. Added back to net income net of tax
c. Deducted from net income net of tax
d. Ignored
6. In computing the earnings per ordinary share, noncumulative preference dividends not declared should be
a. Deducted from net income for the year
b. Added to the net income for the year
c. Deducted from net income for the year, net of tax
d. Ignored
7. In calculating earnings per share, which of the following should not be considered?
a. The weighted average number of ordinary shares outstanding
b. The amount of dividends declared on cumulative preference shares
c. The amount of cash dividends declared on ordinary shares
d. The number of ordinary shares resulting from the assumed conversion of bonds outstanding.
8. When computing diluted earnings per share, stock options are
a. Recognized only if they are dilutive
b. Recognized only if they are antidilutive
c. Recognized only if they were exercised
d. Ignored
9. When applying the treasury share method for diluted earnings per share, the market price of the ordinary
shares used for the repurchase is the
a. Price at the end of the year.
b. Average market price
c. Price at the beginning of the year
d. None of these

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BOOK VALUE PER SHARE AND EARNINGS PER SHARE

10. In the diluted earnings per share computation, when the exercise price of the options or warrants exceeds
the average price, the computation would
a. Fairly present diluted earnings per share on a prospective basis
b. Fairly present the maximum potential dilution of diluted earnings per share on a prospective basis
c. Reflect the excess of the number of shares assumed issued over the number of shares assumed
reacquired as the potential dilution of earnings per share
d. Be antidilutive

FINANCIAL ACCOUNTING & REPORTING - PROBLEMS

Problem 1: JCHAN71954 Corporation’s December 31, 2022 balance sheet reports the following shareholders’
equity:
8% Cumulative Preference share capital, P100 par value per share,
10,000 shares issued and outstanding P1,000,000
Ordinary share capital, P100 par value, 50,000 shares issued & outstanding 5,000,000
Share premium reserve 600,000
Retained Earnings 1,500,000

The last payment of dividend on preference was on December 31, 2019. If JCHAN71954 is to be liquidated,
the preference shareholders would receive par value plus a premium of P10 per share.

What is the book value per share on ordinary share?

a. 133.60 b. 135.20 c. 136.80 d. 137.20

Problem 2: GGADOT301985 Corporation’s December 31, 2022 balance sheet reports the following shareholders’
equity:
10% Cumulative Preference share capital, P100 par value per share, 15,000 shares
issued and outstanding P1,500,000
Ordinary share capital, P100 par value, 50,000 shares issued 5,000,000
Share premium reserve 600,000
Treasury Stock, (ordinary) 5,000 shares at cost 650,000
Retained Earnings 2,100,000
The last payment of dividend on preference was in December 31, 2020. If GGADOT301985 is to be liquidated,
the preference shareholders would receive par value plus a premium of P10 per share.
1. What is the book value per share on ordinary share?
a. 132.00 b. 133.00 c. 146.67 d. 147.70

2. If the preference share is participating, what is the book value per share on ordinary share?
a. 126.00 b. 137.50 c. 140.00 d. 146.00

Problem 3: The shareholders’ equity of KSTEWART91990 Company shows the following balances on December
31, 2022:
10% Preference share capital, cumulative and nonparticipating,
P100 par with a liquidation value of P110, 20,000 shares P2,000,000
Ordinary share capital, P100 par, 30,000 shares 3,000,000
Subscribed ordinary shares 1,000,000
Subscription receivable 600,000
Treasury stock, 5,000 shares, at cost, (ordinary) 400,000
Share premium reserve 660,000
Retained earnings 1,360,000
What is the book value per share of ordinary share, assuming preference dividends are in arrears since 2019?
a. 115.50 b. 132.00 c. 154.00 d. 184.80

Problem 4: On January 1, 2022, JMCAVOY211979 Corporation, whose stock is publicly traded had 200,000 shares
of ordinary shares issued and outstanding. On April 1, 2022, the company issued 10% stock dividends. On
October 1, 2022, additional 20,000 shares were issued for cash and on November 1, 2022, the shares were split
on a 2 for 1 basis.
What is the number of shares to be used in computing earnings per share on December 31, 2022?
a. 440,000 b. 450,000 c. 460,000 d. 480,000

Problem 5: EWATSON151990 Company had 120,000 shares of ordinary share issued and outstanding at January
1, 2022. On January 2, 2022, the company issued 80,000 shares of preferred stock. During the year, the
company declared and paid P420,000 cash dividend on the ordinary and P240,000 on the preference. Net income
for the year was P1,500,000.
What should be the basic earnings per share in 2022?
a. 9.50 b. 10.50 c. 12.50 d. 15.75

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BOOK VALUE PER SHARE AND EARNINGS PER SHARE

Problem 6:
PRUDD61969 Company has 200,000 shares of ordinary shares outstanding on January 1, 2022. On March 31,
2022, 100,000 shares of 10% convertible preference share par value of P10 were issued, the preference shares
are convertible into 50,000 shares of ordinary shares. On December 31, 2022, PRUDD61969 Company reported
a net income of P1,140,000 and paid dividends of P300,000 to ordinary and P100,000 to preference shareholders.

What is the diluted earnings per share?

a. 4.38 b. 4.56 c. 4.80 d. 5.07

Problem 7:
CTATUM261980 Company has 200,000 shares of ordinary share on January 1, 2022. On August 31, 2022, 9%
convertible P2,000,000 face value (equal to its liability component) bonds were issued. Each 1,000 bonds are
convertible into 45 ordinary shares. Net income after income tax of P1,684,200 was reported by CTATUM261980
for the entire year. Income tax rate is 32%

What is the diluted earnings per share?

a. 7.32 b. 7.50 c. 7.85 d. 8.42

Problem 8:
On January 1, 2022, RDOWNEYJR41965 Company had 50,000 shares of ordinary share outstanding that did not
change during 2021 and 2022. RDOWNNEYJR41965 Company granted options to certain executives to purchase
9,000 shares of its ordinary share at P70 each. The average market price of ordinary share was P105 per share
during 2022. Net income for the year is P500,000.

1. What is the basic earnings per share?

a. 8.47 b. 10.00 c. 9.43 d. 8.93

2. What is the diluted earnings per share?

a. 8.47 b. 10.00 c. 9.43 d. 8.93

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