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CHAPTER 17
EARNINGS PER SHARE
CHAPTER STUDY OBJECTIVES
1. Understand why earnings per share (EPS) is an important number. Earnings per share
numbers give common shareholders an idea of the amount of earnings that can be attributed to
each common share. This information is often used to predict future cash flows from the shares
and to value companies.
2. Understand when and how earnings per share must be presented, including related
disclosures. Under IFRS, EPS must be presented for all public companies or companies that
are intending to go public. The calculations must be presented on the face of the income
statement for net income from continuing operations and net income (for both basic EPS and
diluted EPS in the case of complex capital structures). When there are discontinued operations,
the per share impact of these items must also be shown, but it can be shown either on the face
of the income statement or in the notes. Comparative calculations must also be shown.
3. Calculate earnings per share for companies with a simple capital structure. Basic
earnings per share is an actual calculation that takes income available to common shareholders
and divides it by the weighted average number of common shares outstanding during the
period.
4. Calculate earnings per share for companies with a complex capital structure. Diluted
earnings per share is a “what if” calculation that considers the impact of potential common
shares. Potential common shares include convertible debt and preferred shares, options and
warrants, contingently issuable shares, and other instruments that may result in additional
common shares being issued by the company. They are relevant because they may cause the
present interests of the common shareholders to become diluted.
The if-converted method considers the impact of convertible securities such as convertible debt
and preferred shares. It assumes that the instruments are converted at the beginning of the year
(or issue date, if later) and that any related interest or dividend is thus avoided.
The treasury stock method looks at the impact of written call options on EPS numbers. It
assumes that the options are exercised at the beginning of the year and that the money from
the exercise is used to buy back shares in the open market at the average common share price.
The reverse treasury stock method looks at the impact of written put options. It assumes that
the options are exercised at the beginning of the year and that the company first issues shares
in the market (at the average share price) to obtain sufficient funds to buy the shares under the
option.
Antidilutive potential common shares are irrelevant since they would result in diluted EPS
calculations that are higher than the basic EPS. Diluted EPS must show the worst possible EPS
number. Note that purchased options and written options that are not in the money are ignored
for purposes of calculating diluted EPS because they are either antidilutive or will not be
exercised.
Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
17 - 2 Test Bank for Intermediate Accounting, Eleventh Canadian Edition
5. Understand how analysis helps users of financial statements assess performance.

EPS is one of the most commonly used metrics for assessing performance. Diluted EPS is
especially important because it allows for the effects of potential dilution. The price earnings
ratio is often used to value companies.
6. Identify the major differences in accounting between ASPE and IFRS, and what
changes are expected in the near future. ASPE does not prescribe accounting standards for
EPS. The IASB and FASB were working on a revised plan of action to study the issues. At the
time of writing, work on the project was paused.
Earnings Per Share 17 - 3
MULTIPLE CHOICE—Conceptual
Answer No. Description
c 1. Objective of EPS
c 2. EPS presentation
b 3. Basic and Diluted EPS
d 4. EPS disclosure
c 5. Simple capital structure
a 6. Calculating basic EPS
d 7. Weighted average of common shares outstanding
c 8. Contingently issuable shares
a 9. IFRS nomenclature
d 10. Choose incorrect statement.
b 11. Effect of dividends on non-convertible preferred shares
c 12. Effect of treasury shares on EPS
d 13. Diluted EPS
b 14. Dilutive convertible securities
a 15. Cumulative convertible preferred shares effect on EPS
d 16. Treasury stock method
a 17. Treasury stock method
b 18. Treasury stock method
d 19. Antidilutive securities
d 20. EPS calculation with two dilutive convertible securities
b 21. Reverse treasury stock method.
b 22. Choose correct statement.
a 23. "If-converted" method
c 24. EPS analysis
a 25. EPS valuation
d 26. IFRS vs ASPE
b 27. Challenges for standard setters
MULTIPLE CHOICE—Computational
c 28. Calculate basic EPS.
b 30. Calculate weighted average of common shares outstanding.
b 31. Calculate basic EPS.
c 32. Calculate basic EPS with non-convertible preferred shares.
b 35. Calculate denominator for basic and diluted EPS with convertible bonds.
b 36. Calculate denominator for basic and diluted EPS with convertible bonds.
a 37. Calculate denominator for basic and diluted EPS with convertible bonds.
b 39. Calculate diluted EPS with convertible bonds.
c 40. Calculate diluted EPS with convertible bonds.
c 42. Calculate diluted EPS with convertible preferred shares.
Copyright © 2016John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
MULTIPLE CHOICE—Computational (Cont’d)

c 43. Calculate diluted EPS with convertible bonds and convertible preferred
shares.
b 44. Calculate diluted EPS with convertible preferred shares.
b 46. Calculate diluted EPS with convertible preferred shares and convertible
bonds.
d 47. Use of treasury stock method with outstanding warrants
b 48. Calculate denominator for diluted EPS with outstanding stock options.
b 49. Calculate denominator for diluted EPS with call options.
d 50. Calculate diluted EPS.
EXERCISES
Item Description
E17-51 EPS Calculations
E17-52 EPS Disclosures under IFRS
E17-53 EPS Presentation
E17-54 Weighted average of common shares outstanding
E17-55 Earnings per share (definitions)
E17-56 Basic and diluted earnings per share
E17-57 Basic and diluted earnings per share
E17-58 Effect of dilutive securities on earnings per share calculations
E17-59 Diluted earnings per share
E17-60 Company Valuation using EPS
E17-61 Assessing performance using EPS
PROBLEMS
Item Description
P17-62 Weighted average calculations
P17-63 Basic earnings per share
P17-64 Diluted earnings per share
P17-65 Basic and diluted earnings per share
MULTIPLE CHOICE—Conceptual
1. EPS is important to common shareholders for all of the following reasons, EXCEPT
a) it indicates the amount of income that is earned by each common share.
b) common shareholders have a residual interest in the company.
c) it is an indicator of cumulative dividend payments.
d) it is an indicator of the amount of income earned by each share.
Answer: c
Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Knowledge
2. EPS is normally
a) on the income statement of privately held and publicly traded corporations.
b) in the notes to the financial statements.
c) not a requirement under ASPE.
d) provided at the discretion of management.
Answer: c
Difficulty: Easy
3. Diluted EPS is only required when

a) a company has discontinued operations.
b) there is a complex capital structure.
c) basic EPS can’t be calculated.
d) a company uses ASPE.
Answer: b
Difficulty: Easy
Learning Objective: Understand when and how earnings per share must be presented, including
related disclosures.
Section Reference: Presentation and Disclosure
4. Standard setters require the EPS calculation be included

a) only when there is a complex capital structure.
b) under both IFRS and ASPE.
c) when is an indicator of cumulative dividend payments.
d) for all publicly traded companies.
Answer: d
Difficulty: Easy
5. With respect to the calculation of earnings per share, which of the following would suggest a
simple capital structure?
a) common shares and convertible bonds
b) earnings derived from one primary line of business
c) common shares and non-convertible preferred shares
d) common shares and convertible preferred shares
Answer: c
Difficulty: Easy
Learning Objective: Calculate earnings per share for companies with a simple capital structure.
Section Reference: Capital Structure
6. In calculating basic earnings per share, if the preferred shares are cumulative, the amount
that should be deducted as an adjustment to the numerator is the
a) annual preferred dividend.
b) preferred dividends in arrears.
c) annual preferred dividend times (one minus the income tax rate).
d) preferred dividends in arrears times (one minus the income tax rate).
Answer: a
Difficulty: Medium
7. In calculating the weighted average of common shares outstanding, when a stock dividend or
stock split occurs, the additional shares are
a) ignored.
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.
Answer: d
Difficulty: Medium
8. When a corporation agrees to issue common shares if some specific future event occurs,
such shares are known as
a) potential treasury shares.
b) potential common shares.
c) contingently issuable shares.
d) convertible common shares.
Answer: c
Difficulty: Medium
9. Under IFRS, common shares are also called

a) ordinary shares.
b) potential shares.
c) treasury shares.
d) non-dilutive shares.
Answer: a
Difficulty: Easy
10. Which of the following statements is INCORRECT?

a) Options that are out of the money are ignored in earnings per share calculations.
b) The treasury stock method is used for written call options.
c) Corporations that have only antidilutive securities are not permitted to increase their earnings
per share and are required to report only basic earnings per share.
d) Contingently issuable shares are never included in diluted earnings per share calculations.
Answer: d
Difficulty: Medium
11. In calculating diluted earnings per share, dividends on non-convertible cumulative preferred
shares should be
a) ignored.
b) deducted from net income whether declared or not.
c) deducted from net income only if declared.
d) added back to net income whether declared or not.
Answer: b
Difficulty: Easy
12. What effect will the acquisition of treasury shares have on shareholders' equity and basic
earnings per share, respectively?
Shareholders equity Basic EPS
a) decrease no effect
b) increase no effect
c) decrease increase
d) increase decrease
Answer: c
Difficulty: Medium
Learning Objective: Calculate earnings per share for companies with a complex capital
structure.
Section Reference: Complex Capital Structure
Bloomcode: Comprehension
13. When calculating diluted earnings per share, convertible bonds are
a) ignored.
b) assumed converted whether they are dilutive or antidilutive.
c) assumed converted only if they are antidilutive.
d) assumed converted only if they are dilutive.
Answer: d
Difficulty: Easy
structure.
14. Dilutive convertible securities must be used in the calculation of

a) basic earnings per share only.
b) diluted earnings per share only.
c) diluted and basic earnings per share.
d) silly question: such securities are never included.
Answer: b
Difficulty: Easy
structure.
15. In calculating diluted earnings per share, the equivalent number of convertible preferred
shares is added as an adjustment to the denominator. If the preferred shares are cumulative,
which amount should then be added as an adjustment to the numerator?
a) annual preferred dividend
b) annual preferred dividend times (one minus the income tax rate)
c) annual preferred dividend times the income tax rate
d) annual preferred dividend divided by the income tax rate
Answer: a
Difficulty: Medium
structure.
16. In calculating diluted earnings per share, the treasury stock method is used for written call
options and equivalents to reflect assumed reacquisition of common shares at the average
market price during the period. If the exercise price of the options or warrants exceeds the
average market price, the calculation 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.
Answer: d
Difficulty: Medium
structure.
17. In applying the treasury stock method to determine the dilutive effect of options and
warrants, the proceeds assumed to be received upon exercise of the options and warrants
a) are used to calculate the number of common shares repurchased at the average market
price, when calculating diluted earnings per share.
b) are added, net of tax, to the numerator of the calculation for diluted earnings per share.
c) are disregarded in the calculation of earnings per share if the exercise price of the options
and warrants is less than the ending market price of common shares.
d) are not included in the calculation.
Answer: a
Difficulty: Medium
structure.
18. When applying the treasury stock method, the price of the common shares used for the
assumed repurchase is the
a) market price at the end of the year.
b) average market price during the year.
c) market price at the beginning of the year.
d) market price at the time the options or warrants were granted.
Answer: b
Difficulty: Medium
structure.
19. Antidilutive securities

a) should be included in the calculation of diluted earnings per share but not basic earnings per
share.
b) are those whose inclusion in earnings per share calculations would cause basic earnings per
share to exceed diluted earnings per share.
c) include call options and warrants whose exercise price is less than the average market price
of common shares.
d) should be ignored in all earnings per share calculations.
Answer: d
Difficulty: Easy
structure.
20. Assume a corporation has two potentially dilutive convertible securities outstanding. The
one that should be used first to calculate diluted earnings per share is the security with the
a) greater earnings adjustment.
b) greater earnings per share adjustment.
c) smaller earnings adjustment.
d) smaller earnings per share adjustment.
Answer: d
Difficulty: Hard
structure.
21. The reverse treasury stock method is used for

a) written call options.
b) written put options.
c) convertible preferred shares.
d) convertible bonds.
Answer: b
Difficulty: Medium
structure.
22. Which of the following statements is correct?
a) Options that are in the money are ignored in earnings per share calculations.
b) Options that are out of the money are ignored in earnings per share calculations.
c) Contingently issuable shares are never included in diluted earnings per share calculations.
d) The treasury stock method is used for written put options.
Answer: b
Difficulty: Medium
structure.
23. The if-converted method of calculating earnings per share data assumes conversion of
convertible securities as of the
a) beginning of the earliest period reported (or at time of issuance, if later).
b) beginning of the earliest period reported (regardless of time of issuance).
c) middle of the earliest period reported (regardless of time of issuance).
d) ending of the earliest period reported (regardless of time of issuance).
Answer: a
Difficulty: Medium
structure.
Bloomcode: Application
24. Standard setters are very specific regarding the calculation of EPS for all of the following
reasons EXCEPT
a) predictor of future company value.
b) it can be used to assess management stewardship.
c) the income tax consequences of increased share value.
d) because of the dilutive nature of complex financial instruments.
Answer: c
Difficulty: Medium
Learning Objective: Understand how analysis helps users of financial statements assess
performance.
Section Reference: Analysis
25. All of the following regarding company valuation are true EXCEPT for
a) EPS is the preferred method recommended by standard setters.
b) sustainable cash flow or earnings can be used.

c) EPS can be used because it is considered reliable and all inclusive.
d) using EPS provides a very rough calculation only.
Answer: a
Difficulty: Medium
performance.
26. The main difference between IFRS and ASPE as it relates to EPS calculations is
a) there is no difference.
b) diluted EPS applies only to IFRS, both use basic EPS.
c) only companies with complex financial structures must calculate EPS under IFRS.
d) there are no prescribed standards under ASPE.
Answer: d
Difficulty: Medium
Learning Objective: Identify the major differences in accounting between ASPE and IFRS, and
what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE and Looking Ahead
27. Major challenges for standard setters calculating EPS includes all of the following, EXCEPT
a) complex financial instruments.
b) redeveloping standards under ASPE.
c) treatment of conversion features.
d) dilutive securities.
Answer: b
Difficulty: Medium
MULTIPLE CHOICE—Computational
28. At January 1, 2017, Ariel Corp. had 300,000 common shares outstanding (no preferred
shares issued). On July 1, 2017, the corporation issued 450,000 shares, and reported net
income of $630,000 for calendar 2017. Basic earnings per share for 2017 would be
a) $2.10.
b) $1.40.
c) $1.20.
d) $0.84.
Answer: c
Difficulty: Easy
Feedback: $630,000 ÷ 300,000 + (450,000 x 6 ÷ 12) = $1.20
29. At December 31, 2017, Barium Corp. had 500,000 common shares outstanding, 400,000 of
which were issued and outstanding throughout the year and 100,000 of which were issued on
October 1, 2017. Net income for calendar 2017, was $255,000. There are no preferred shares
issued. Basic earnings per share for 2017 would be
a) $0.51.
b) $0.57.
c) $0.60.
d) $0.64.
Answer: c
Difficulty: Easy
Feedback: $255,000 ÷ 400,000 + (100,000 x 3 ÷ 12) = $0.60
30. At January 1, 2017, Calypso Ltd had 600,000 common shares outstanding (no preferred
shares issued). During 2017, Calypso issued 84,000 shares on May 1, purchased 42,000
treasury shares on September 1, and issued 36,000 more shares on November 1. The weighted
average of common shares outstanding for 2017 is
a) 634,000.
b) 648,000.
c) 662,000.
d) 676,000.
Answer: b
Difficulty: Medium
Feedback: 600,000 + (84,000 × 8 ÷ 12) – (42,000 × 4 ÷ 12) + (36,000 × 2 ÷ 12) = 648,000
31. During 2017, Malamute Ltd. had 200,000 common shares, 30,000 non-cumulative
convertible preferred shares, and $1,500,000 10% convertible bonds outstanding. The preferred
shares are convertible into 40,000 common shares. During 2017, Malamute paid dividends of
$1.20 per share to the common shares and $2.00 per share to the preferred shares. Each
$1,000 bond is convertible into 45 common shares. The net income for 2017 was $900,000 and
the income tax rate was 30%. Basic earnings per share for 2017 is
a) $3.75.
b) $4.20.
c) $4.35.
d) $4.50.
Answer: b
Difficulty: Easy
Feedback: $900,000 – (30,000 x $2) ÷ 200,000 = $4.20
32. At December 31, 2016, Riel Corp. had 300,000 common shares outstanding. No additional
common shares were issued during 2017. On January 1, 2017, Riel issued 400,000 non-
cumulative, non-convertible preferred shares. During 2017, Riel paid cash dividends of
$180,000 to the common shares and $150,000 to the preferred shares. Net income for calendar
2017, was $480,000. Their income tax rate is 40%. Basic earnings per share for 2014 is
a) $0.46.
b) $1.00.
c) $1.10.
d) $1.60.
Answer: c
Difficulty: Easy
Feedback: $480,000 – $150,000 ÷ 300,000 = $1.10
33. At December 31, 2016, Tantalum Corp. had 300,000 common shares outstanding. No
common shares were issued during 2017; however, on January 1, 2017, Terrier issued 200,000
non-cumulative, non-convertible preferred shares. During 2017, Terrier paid cash dividends of
$100,000 to the common shareholders and $80,000 to the preferred shareholders. Net income
for calendar 2017 was $300,000. Basic earnings per share for 2017 would be
a) $0.67.
b) $0.73.
c) $1.00.
d) $1.67.
Answer: b
Difficulty: Easy
Feedback: $300,000 – $80,000/ 300,000 = $0.73
34. At December 31, 2016 and 2017, Danish Corp. had 100,000 common shares and 10,000,
$5, no par value cumulative preferred shares outstanding. No dividends were declared in 2016
or 2017. Net income for 2017 was $400,000. For 2017, basic earnings per share would be
a) $4.00.
b) $3.50.
c) $3.00.
d) $2.00.
Answer: b
Difficulty: Easy
$400,000 − (10,000  $5.00)
Feedback: = $3.50
100,000
35. At December 31, 2016, Marion Inc. had 6,000,000 common shares outstanding. An
additional 1,000,000 common shares were issued on April 1, 2017, and 500,000 more on July 1,
2017. On October 1, 2017, Marion issued 25,000, $1,000 par value, 8% convertible bonds.
Each bond is convertible into 20 common shares. No bonds were converted in 2017. What is
the number of shares to be used in calculating 2017 basic earnings per share and diluted
earnings per share, respectively?
a) 7,000,000 and 7,000,000
b) 7,000,000 and 7,125,000
c) 7,000,000 and 7,500,000
d) 7,500,000 and 8,500,000
Answer: b
Difficulty: Medium
structure.
Feedback: 6,000,000 + (1,000,000 × 9/12) + (500,000 × 6 ÷ 12) = 7,000,000
7,000,000 + (25,000 × 20 × 3 ÷ 12) = 7,125,000
36. At December 31, 2016, Parrot Corp. had 1,000,000 common shares outstanding (no
preferred shares issued). An additional 100,000 shares were issued on April 1, 2017, and
240,000 more on September 1. On October 1, Parrot issued $3,000,000 (par value) 9%
convertible bonds. Each $1,000 bond is convertible into 40 common shares. No bonds have
been converted yet. The number of shares to be used in calculating basic earnings per share
and diluted earnings per share for 2017 is
a) 1,155,000 and 1,155,000.
b) 1,155,000 and 1,185,000.
c) 1,155,000 and 1,275,000.
d) 1,540,000 and 1,660,000.
Answer: b
Difficulty: Medium
structure.
Feedback: 1,000,000 + (100,000 × 9 ÷ 12) + (240,000 × 4 ÷ 12) = 1,155,000
1,155,000 + ($3,000,000  $1,000 )  40  3 ÷ 12  = 1,185,000
37. At December 31, 2016, St. John’s Limited had 4,000,000 common shares outstanding (no
preferred shares issued). An additional 250,000 common shares were issued on July 1, 2017,
and 500,000 more on October 1, 2017. As well, on April 1, 2017, St. John’s issued 10,000,
$1,000 face value, 8% convertible bonds. Each bond is convertible into 40 common shares. No
bonds were converted in 2017. What is the number of shares to be used in calculating basic
earnings per share and diluted earnings per share, respectively, for 2017?
a) 4,250,000 and 4,550,000
b) 4,250,000 and 4,250,000
c) 4,250,000 and 4,650,000
d) 4,750,000 and 5,050,000
Answer: a
Difficulty: Hard
structure.
Feedback: 4,000,000 + (250,000 × 6 ÷ 12) + (500,000 × 3 ÷ 12) = 4,250,000
4,250,000 + (10,000 × 40 × 9 ÷ 12) = 4,550,000
38. Information concerning the capital structure of Shepherd Corporation follows

December 31,
2017 2016
Common shares outstanding 100,000 shares 100,000 shares
Convertible preferred shares outstanding 10,000 shares 10,000 shares
9% convertible bonds $2,000,000 $2,000,000
During 2017, Shepherd paid dividends of $1.00 per common share and $2.50 per preferred
share. The preferred shares are non-cumulative, and convertible into 20,000 common shares.
The 9% convertible bonds are convertible into 50,000 common shares. Net income for calendar
2017 was $500,000. Assume the income tax rate is 30%. Basic earnings per share for 2017 is
a) $3.33.
b) $3.65.
c) $4.75.
d) $5.00.
Answer: c
Difficulty: Medium
structure.
$500,000 − (10,000  $2.50)
Feedback: = $4.75
100,000
39. On January 2, 2017, Delila Inc. issued at par $10,000 6% bonds convertible into 1,000 of
their common shares. No bonds were converted during 2017. Throughout 2017, Delila had
1,000 common shares outstanding (no preferred shares issued). Delila’s 2017 net income was
$6,000, and their income tax rate is 30%. No potentially dilutive securities other than the
convertible bonds were outstanding during 2017. Delila diluted earnings per share for 2017
would be
a) $3.00.
b) $3.21.
c) $3.30.
d) $6.42.
Answer: b
Difficulty: Medium
structure.
$6,000 + ($10,000  .06  .70)
Feedback: = $3.21
1,000 + 1,000
40. At December 31, 2016, Felix Ltd. had 500,000 common shares outstanding (no preferred
shares issued). On October 1, 2017, an additional 100,000 common shares were issued. In
addition, Felix had $5,000,000, 6% convertible bonds outstanding at December 31, 2016, which
are convertible into 225,000 common shares; however, no bonds were converted during 2017.
Net income for calendar 2017 was $1,500,000. Assuming the income tax rate was 30%, the
diluted earnings per share for 2017 would be
a) $3.26.
b) $2.40.
c) $2.28.
d) $2.00.
Answer: c
Difficulty: Medium
structure.
$1,500,000 + ($5,000,00 0  .06  .7)
Feedback: = $2.28
 3 
500,000 + 100,000   + 225,000
 12 
41. On January 2, 2017, Helisinki Ltd. issued at par $300,000, 9% convertible bonds. Each
$1,000 bond is convertible into 30 shares. No bonds were converted during 2017. There were
50,000 common shares outstanding during 2017 (no preferred shares issued). Helsinki’s 2017
net income was $160,000 and their income tax rate was 30%. Helsinki’s diluted earnings per
share for 2017 would be
a) $2.71.
b) $3.03.
c) $3.20.
d) $3.58.
Answer: b
Difficulty: Medium
structure.
$160,000 + ($300,000  .09  .7)
Feedback: = $3.03
50,000 + ($300,000  $1,000 )  30
42. At December 31, 2016, Labrador Ltd. had 800,000 common shares outstanding. In addition,
the corporation had 300,000 non-cumulative preferred shares outstanding, which were
convertible into 500,000 common shares. During 2017, Labrador paid cash dividends of
$300,000 to the common shares and $200,000 to the preferred shares. Net income for 2017
was $1,200,000 and the income tax rate was 40%. Diluted earnings per share for 2017 is
a) $2.40.
b) $1.50.
c) $0.92.
d) $0.55.
Answer: c
Difficulty: Medium
structure.
Feedback: $1,200,000 ÷ (800,000 + 500,000) = $0.92
43. During 2017, Madrid Ltd. had 200,000 common shares, 30,000 non-cumulative convertible
preferred shares, and $1,500,000 10% convertible bonds outstanding. The preferred shares are
convertible into 40,000 common shares. During 2017, Madrid paid dividends of $1.20 per share
to the common shares and $2.00 per share to the preferred shares. Each $1,000 bond is
convertible into 45 common shares. The net income for 2017 was $900,000 and the income tax
rate was 30%. Diluted earnings per share for 2017 is
a) $2.98.
b) $3.38.
c) $3.27.
d) $3.41.
Answer: c
Difficulty: Medium
structure.
$900,000 + ($1,500,00 0  .10  .7)
Feedback: = $3.27
200,000 + 67,500 + 40,000
44. On December 31, 2016, RojoLtd. had 2,000,000 common shares outstanding. On January
1, 2017, Rojo issued 500,000 non-cumulative preferred shares, which were convertible into
1,000,000 common shares. During 2017, Rojo paid cash dividends of $900,000 to the common
shares and $300,000 to the preferred shares. Net income for calendar 2017, was $6,000,000.
Assuming an income tax rate of 30%, the diluted earnings per share for 2017 is
a) $1.80.
b) $2.00.
c) $2.80.
d) $3.00.
Answer: b
Difficulty: Medium
structure.
Feedback: $6,000,000 ÷ (2,000,000 + 1,000,000) = $2.00
45. At December 31, 2016, Jack Russell Ltd. had 900,000 common shares outstanding (no
preferred shares issued). On September 1, 2017, an additional 300,000 common shares were
issued. In addition, Jack Russell had $10,000,000 (par value) 6% convertible bonds outstanding
at December 31, 2016, which are convertible into 600,000 common shares. No bonds were
converted in 2017. Net income for calendar 2017 was $3,750,000. Assuming the income tax
rate is 30%, the diluted earnings per share for 2017 is
a) $2.35.
b) $2.61.
c) $2.72.
d) $3.75.
Answer: b
Difficulty: Hard
structure.
$3,750,000 + ($10,000,000  .06  .7)
Feedback: = $2.61
900,000 + (300,000   ÷ ) + 
46. Information concerning the capital structure of Shelmardine Corporation follows

December 31,
2017 2016
Common shares outstanding 100,000 shares 100,000 shares
Convertible preferred shares outstanding 10,000 shares 10,000 shares
9% convertible bonds $2,000,000 $2,000,000
During 2017, Shelmardine paid dividends of $1.00 per common share and $2.50 per preferred
share. The preferred shares are non-cumulative, and convertible into 20,000 common shares.
The 9% convertible bonds are convertible into 50,000 common shares. Net income for calendar
2017 was $500,000. Assume the income tax rate is 30%.
What is the diluted earnings per share for 2017?
a) $4.00
b) $3.68
c) $3.54
d) $2.94
Answer: b
Difficulty: Hard
structure.
$500,000 + ($2,000,00 0  .09  .7)
Feedback: = $3.68
100,000 + 50,000 + 20,000
47. Warrants exercisable at $20 each to obtain 50,000 common shares were outstanding during
a period when the average market price of the common shares was $25. Application of the
treasury stock method in calculating diluted earnings per share will increase the weighted
average number of outstanding shares by
a) 50,000.
b) 40,000.
c) 12,500.
d) 10,000.
Answer: d
Difficulty: Medium
structure.
Feedback: 50,000 × $20 ÷ $25 = 40,000
50,000 – 40,000 = 10,000
48. At December 31, 2017, Spearmint Inc. had 300,000 common shares outstanding (no
preferred shares issued). In addition, the corporation had granted 90,000 stock options to
certain executives, and which gave them the right to purchase Spearmint’s shares at the option
price of $37 per share. None of these options have yet been exercised. The average market
price of Spaniel's common shares during 2017 was $50. What is the number of shares that
should be used in calculating diluted earnings per share for 2017?
a) 300,000
b) 323,400
c) 331,622
d) 366,600
Answer: b
Difficulty: Medium
structure.
Feedback: 90,000 – (90,000 × $37 ÷ $50) = 23,400
300,000 + 23,400 = 323,400
49. At December 31, 2016, Skye Inc. had 500,000 common shares outstanding (no preferred
shares issued). On July 1, 2017, an additional 50,000 common shares were issued. Skye also
had unexercised call options to purchase 40,000 common shares at $15 per share outstanding
throughout 2017. The average market price of Skye's common shares was $20 during 2017.
The number of shares that should be used in calculating diluted earnings per share for 2017 is
a) 525,000.
b) 535,000.
c) 560,000.
d) 565,000.
Answer: b
Difficulty: Medium
structure.
Feedback: 500,000 + (50,000 × 6 ÷ 12) + 40,000 – (40,000 × $15 ÷ $20) = 535,000
50. Throughout 2017, Moon Ltd. had 1,200,000 common shares outstanding. As well, the
corporation paid $300,000 in preferred dividends and reported net income of $5,100,000 for
2017. In connection with the acquisition of a subsidiary company in June 2016, Moon is required
to issue 50,000 additional common shares on July 1, 2018, to the former owners of the
subsidiary. Moon’s diluted earnings per share for 2017 should be
a) $4.25.
b) $4.08.
c) $4.00.
d) $3.84.
Answer: d
Difficulty: Medium
structure.
$5,100,000 − $300,000
Feedback: = $3.84
1,200,000 + 50,000
EXERCISES
Ex. 17-51 EPS calculations

What are the two formulas normally calculated only for common shares, and how and why are
they used?
Solution 17-51
Basic EPS – looks at the actual earnings and the actual number of common shares outstanding.
Earnings per share disclosures help investors by indicating the amount of income that is earned
by each share. It helps shareholders assess future dividend payouts and value of each share.
Diluted EPS – is a “what if” calculation that takes into account the possibility that financial
instruments such as convertible debt and options might have a negative impact on existing
shareholder returns; therefore, the shares value. It a corporation has a complex capital structure
both EPS and diluted EPS would be presented.
Difficulty: Medium
Ex. 17-52 EPS disclosures under IFRS

What EPS disclosures are required under IFRS?
Solution 17-52
IFRS requires the following
• Earnings per share amounts must be shown for all periods presented.
• If there has been a stock dividend or stock split, all per share amounts of prior period
earnings should be restated using the new number of outstanding shares.
• If diluted EPS data are reported for at least one period, they should be reported for all
periods that are presented, even if they are the same basic EPS.
• When the results of operations of a prior period have been restated the corresponding EPS
date should also be restated. The restatement’s effect should then be disclosed in the year
of the restatements.
Difficulty: Medium
Ex. 17-53 EPS presentation

When and how is EPS used and presented?
Solution 17-53
EPS is required under IFRS only and is presented on the face of the income statement. This is
due to the importance of EPS information for companies whose shares are trading on the stock
markets or that are in the process of listing on a stock market. In Canada only publicly traded
companies are required use IFRS. Privately held companies can choose to whether or not they
wish to prescribe to IFRS. ASPE does not require EPS calculations or disclosures, mainly
because these firms are closely held and due to the cost – benefit considerations. The are no
standards for calculating EPS under ASPE at all.
Difficulty: Easy
Ex. 17-54 Weighted average of common shares outstanding

At January 1, 2017, Elan Corporation had 300,000 common shares outstanding (no preferred
issued). On March 1, the corporation issued 45,000 new shares to raise additional capital. On
July 1, the corporation declared and issued a 2 for 1 stock split. On October 1, the corporation
purchased on the open market 180,000 of its own shares at $35 each and retired them.
Instructions
Calculate the weighted average number of common shares outstanding to be used in
calculating earnings per share for 2017.
Solution 17-54
Increase Shares Portion of yr Stock
(Decrease) Outstanding Outstanding Split
Jan 1 300,000 2/12 x2 100,000
Mar 1 45,000 345,000 4/12 x2 230,000
Jul 1 345,000 690,000 3/12 172,500
Oct 1 (180,000) 510,000 3/12 127,500
Weighted average of common shares 630,000
Difficulty: Medium
Ex. 17-55 Earnings per share

Define the following
a) The calculation of earnings per share
b) Complex capital structure
c) Basic earnings per share
d) Diluted earnings per share
Solution 17-55
a) Earnings per share is calculated by dividing net income less preferred dividends by the
weighted average number of common shares outstanding.
b) A complex capital structure exists when a corporation has convertible securities, options,
warrants, or other rights that upon conversion or exercise could dilute earnings per share.
c) Basic earnings per share is calculated based on the weighted average number of shares
outstanding during the period.
d) Diluted earnings per share is calculated based on the weighted average number of shares
outstanding during the period, plus all potentially dilutive common shares that were
outstanding during the period.
Difficulty: Medium
structure.
Ex. 17-56 Basic and diluted earnings per share

Throughout the calendar year 2017, Kali Corporation has 400,000 common shares outstanding
(no preferred shares issued). In addition, Collie has 5,000, 20-year, 7% bonds outstanding,
issued at par in 2015. Each $1,000 bond is convertible into 20 common shares after June 30,
2018. Collie reported net income of $600,000 for calendar 2017. Their income tax rate is 30%.
Instructions
Calculate basic and diluted earnings per share for 2017.
Solution 17-56
Net income $600,000
Basic earnings per share: = = $1.50
Outstandin g shares 400,000
Incremental effect of conversion of bonds

Bond interest after taxes $245,000
= = $2.45
Assumed incrementa l shares 100,000
Net income + Interest after taxes
Diluted earnings per share:
Assumed outstandin g shares
$600,000 + $245,000
($350,000 ×.7 = $245,000); = $1.69
400,000 + 100,000
Therefore the bonds are antidilutive, and basic and diluted earnings per share of $1.50 should
be reported.
Difficulty: Medium
structure.
Ex. 17-57 Basic and diluted earnings per share

Barker Inc. reported net income (30% tax rate) of $1,600,000 for calendar 2017, and an average
of 500,000 common shares outstanding during the year. Barker issued $2,000,000 par value,
10-year, 9% convertible bonds on January 1, 2015 at a $18,000 discount. The bonds are
convertible into 60,000 common shares. Barker uses the straight-line method for amortizing the
bond discount.
Instructions
Solution 17-57
Basic earnings per share
($1,600,000 ÷ 500,000 shares) = $3.20
Diluted earnings per share

$1,600,000 +.7($180,000 + $1,800)
————————————————— = $3.08
500,000 + 60,000
Difficulty: Hard
structure.
Ex. 17-58 Effect of dilutive securities on earnings per share calculations

A publicly accountable enterprise is planning on issuing the following two securities in the
coming year
1. Convertible debt where mandatory conversion will take place five years after issue.
2. Debt with detachable warrants. The warrants can be exercised if profits exceed $1,000,000
in the next five years.
Instructions
Discuss how these two securities will affect the earnings per share calculation.
Solution 17-58
1. The convertible debt is an example of an instrument that is mandatorily convertible. As a
result, it is assumed the conversion has already taken place for calculating earnings per
share. The common shares should be treated as if they were outstanding and included in
the weighted average of common shares calculation.
2. The second instrument is an example of contingently issuable shares, contingent on profits

exceeding $1,000,000 for the shares to be issued. If this condition is already met, then the
shares must be treated as if they are issued. However, if the condition has not been met,
then these shares should not be included in the EPS calculation until the condition has
been met.
Difficulty: Medium
structure.
Ex. 17-59 Diluted earnings per share

During 2017, Basenji Corp. had 300,000 common shares outstanding. In addition, at December
31, 2017, 50,000 shares were issuable upon exercise of executive stock options, which require
a $40 cash payment upon exercise (options were granted in 2015). The average market price of
the common shares during 2017 was $50.
Instructions
Calculate the number of shares to be used in determining diluted earnings per share for 2017.
Solution 17-59
Shares outstanding (given) ......................................................... 300,000
Add: Assumed issuance of stock options .................................... 50,000
350,000
Deduct: Proceeds/Average market price ($2,000,000 ÷ $50) ...... (40,000)
Number of shares to use for diluted EPS .................................... 310,000
Difficulty: Medium
structure.
Ex. 17-60 Company valuation Using EPS

When and how might EPS be used for company valuation?
Ex. 17-60
Typically a normalized or sustainable cash flow or earnings number should be used in the
valuation calculation because earnings of new income may be of higher or lower quality.
However, since this requires significant judgement when valuing common shares, the EPS
number is sometimes used instead because it is believed to be more reliable and all inclusive.
PE ratio divides the price of the share by EPS and result is called a multiplier. The multiplier
shows the per share value that each dollar of earnings generates. This is a rough calculation
only and must be used with caution.
Difficulty: Medium
performance.
Ex. 17-61 Assessing performance using EPS

How can EPS be used to assess performance and what challenges arise with this
measurement?
Ex. 17-61
EPS can be used to assess management stewardship and predict future value. Therefore IFRS
is very specific regarding its calculation. From an economic perspective it is very important to
carefully analyze the potential dilutive impact of various securities instruments. This can be quite
difficult due to the complexity of financial instruments that are very complex and difficult to break
down. IASB is continually striving to create greater transparency in EPS calculations.
Difficulty: Medium
performance.
PROBLEMS
Use the following information to answer Pr. 17-62–17-63.
Harley Corp. has been operating successfully for the past fifteen years. However, during recent
years, its common shares outstanding changed as shown below. The corporation uses the
calendar year as its fiscal year.
2017 2016 2015

Shares outstanding, Jan 1 300,000 240,000 200,000
Shares sold, Apr 2015 40,000
25% stock dividend, Jul 1, 2016 60,000
2-for-1 stock split, Jul 1, 2017 300,000
Shares sold, Oct 1, 2017 100,000
Shares outstanding, Dec 31 700,000 300,000 240,000
Net Income $ 750,000 660,000 598,000
Pr. 17-62 Weighted average calculations

Calculate the weighted average number of shares outstanding for each year.
Solution 17-62
2015: (200,000 x 3 ÷ 12) + (240,000 x 9 ÷ 12) = 230,000
2016: (300,000 x 12 ÷ 12) = 300,000

Stock dividend is weighted back to the beginning of the period.
Alternate calculation: (240,000 x 1.25 x 6 ÷ 12) + (300,000 x 6 ÷ 12)
2017: (300,000 x 2 x 6 ÷ 12) + (600,000 x 3 ÷ 12) + (700,000 x 3 ÷ 12) = 625,000
Difficulty: Hard
Pr. 17-63 Basic earnings per share

Assuming there were no preferred shares outstanding, calculate EPS for each year based on
your calculations in Pr. 17-62.
Solution 17-63
2017 2016 2015
Net income $750,000 $660,000 $598,000
Average shares outstanding (including
stock dividend and stock split) 625,000 300,000 230,000
Earnings per share $1.20 $2.20 $2.60
Difficulty: Medium
Pr. 17-64 Diluted earnings per share

On January 1, 2017, Barley Corp. had 200,000 common shares outstanding. On April 1, 2017,
20,000 common shares were issued and on September 1, 2017, Bernard bought back 30,000
treasury shares. The market price of the common shares averaged $50 during 2017. The
corporation’s income tax rate is 40%.
During 2017, there were 30,000 call options to buy common shares at $40 a share outstanding;
and there were 20,000, $7, no par value, cumulative and convertible preferred shares
outstanding. Each preferred share is convertible into three common shares.
During 2016, the corporation had issued $2,000,000 of 8% convertible bonds at face value.
Each $1,000 bond is convertible into 20 common shares.
The corporation reported $750,000 net income for calendar 2017.
Instructions
Calculate diluted earnings per share for 2017. Complete the schedule below and show all
calculations.
Net Adjust Adjusted Adjust Adjusted

Security Income -ment Net Income Shares -ment Shares EPS
Solution 17-64
Net Adjust Adjusted Adjust Adjusted
Com. Shares $750,000 $(140,000) $610,000 200,000 5,000a 205,000 $2.98
Options 610,000 205,000 6,000b 211,000 2.89
Preferred 610,000 140,000 750,000 211,000 60,000 271,000 2.77
Bonds 750,000 96,000c 846,000 271,000 40,000 311,000 2.72
a
20,000 × 3 ÷ 4 = 15,000
30,000 × 1 ÷ 3 = (10,000)
5,000 SA
b
30,000
$1,200,000 ÷ $50 = (24,000) (or) [(50 – 40) ÷ 50] × 30,000 = 6,000 SA
6,000 SA
c $96,000 $140,000
$2,000,000 ×.08 ×.6 = $96,000 = $2.40 = $2.33
40,000 60,000
Difficulty: Hard
structure.
Pr. 17-65 Basic and diluted earnings per share

Bloodhound Corp. provides the following data for calendar 2017
Net Income ....................................................................... $2,400,000
Transactions in Common Shares Change Cumulative

Jan 1 beginning 1,000,000
Mar 1 purchase of treasury shares (60,000) 940,000
Jun 1 shares split 2 for 1 940,000 1,880,000
Nov 1 issuance of new shares 120,000 2,000,000
8% Cumulative Convertible Preferred Shares (no par)

Convertible into 200,000 common shares
adjusted for split on June 1. ....................................... $1,000,000
Stock Options
Exercisable at the option price of $25 per share.
Average market price in 2014 was $30 (market price
and option price adjusted for split)................................. 60,000 shares
Instructions
a) Calculate basic earnings per share for 2017.
b) Calculate diluted earnings per share for 2017.
Solution 17-65
Calculation of weighted average shares outstanding during the year
Jan 1- Feb 29 1,000,000 x 2/12 x 2= 333 333

Mar 1- May 31 940,000 x 3/12 x 2= 470,000
Jun 1- Oct 31 1,880,000 x 5/12= 783,333
Nov 1- Dec 31 2,000,000 x 2/12= 333,333
1,920,000
Additional shares for purposes of diluted earnings per share

Potentially dilutive securities
8% convertible preferred shares.................................................... 200,000
Stock options
Proceeds from exercise of 60,000 options (60,000 × $25) ...... $1,500,000
Shares issued upon exercise of options ................................. 60,000
Less: treasury shares purchasable with proceeds
($1,500,000 ÷ $30) ................................................................. 50,000 10,000
Dilutive securities—additional shares ............................................ 210,000
$2,400,000 − $80,000
a) Basic earnings per share: = $1.21
1,920,000
$2,400,000
b) Diluted earnings per share: = $1.13
1,920,000 + 210,000
Difficulty: Hard
structure.

Aria Ltd. provides the following information for calendar 2017
1. Net income $420,000
2. Capital Structure
a) $8 preferred shares, no par value, cumulative, $600,000
6,000 shares outstanding
No dividends were declared during 2017.
b) Common shares, 76,000 shares outstanding on January 1.
On April 1, 40,000 shares were issued for cash.
On October 1, 16,000 shares were purchased and retired. $1,000,000
c) On January 2, 2016, Aria purchased Apso Corporation.
One of the terms of the purchase was that if Aria’s net income for 2016 or subsequent
years is $400,000 or more, 50,000 additional common shares would be issued to Apso
shareholders.
Instructions
Solution 17-66
Net income........................................................................................... $420,000
*Less preferred dividends ($6,000 x $8) ............................................... (48,000)
Income available to common (numerator) ............................................ $372,000
* Since they are cumulative, PFD dividends are deducted from NI.
The fact dividends were not declared is irrelevant.
Share Changes
Jan 1 ............................................................................................. 76,000
Apr 1, issuance 40,000.................................................................. 40,000
116,000
Oct 1, retirement 16,000................................................................ (16,000)
Ending Balance .................................................................................... 100,000
Weighted average shares outstanding
Jan 1- Mar 31 76,000 x 3/12= 19,000

Apr 1- Sep 30 116,000 x 6/12= 58,000
Oct 1- Dec31 100,000 x 3/12= 25,000
102,000
Basic earnings per share: $372,000 ÷ 102,000 = $3.65
Diluted earnings per share: $372,000 ÷ (102,000 + 50,000) = $2.45
Difficulty: Hard
structure.

Chamaa Ltd. provides the following information for 2017
1. Net income $560,000
2. Capital structure
a) Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible
into 50 common shares for the next 10 years 300,000
b) Common shares, 200,000 shares issued and outstanding during the
entire year 2,000,000
c) Stock options outstanding to buy 16,000 common shares at $20 per share.
3. Other information
a) Bonds converted during 2017 None
b) Income tax rate 30%
c) Convertible debt was outstanding the entire year
d) Average market price per common share during 2017 $32
e) Stock options were outstanding the entire year
f) Stock options exercised during 2017 None
Instructions
Solution 17-67
Basic EPS = $560,000 ÷ 200,000 = $2.80
Net Adjust Adjusted Adjust Adjusted Diluted

Com. Shares $560,000 — $560,000 200,000 — 200,000 $2.80
Options 560,000 — 560,000 200,000 6,000a 206,000 2.72
Conv. Bonds 560,000 $12,600b 572,600 206,000 15,000 221,000 2.59

a
16,000
320,000
= (10,000)
32
6,000 SA
b $12,600
$300,000 ×.06 ×.7 = $12,600; = $.84
15,000
Difficulty: Medium
structure.

Arlt Inc., a publicly accountable corporation, has a July 31 year end. For the 2017 fiscal year,
there were 100,000 common shares outstanding all year. Net income for the year ended July
31, 2017 was $950,000. Their income tax rate is 30%.
Part A During the 2016 fiscal year, Arlt issued at par a 5% convertible bond, face value
$5,000,000. Each $1,000 bond is convertible into 20 common shares. No bonds were converted
in 2016, however, on March 31, 2017, 50% of the bonds were converted into common shares.
Part B On August 1, 2016, Arlt issued 100,000, $2, cumulative, convertible preferred shares.
Two preferred shares are convertible into one common share. On September 30, 2016, 20% of
these preferred shares were converted to common shares. The preferred share dividend was
declared and paid on June 15, 2017.
Instructions
Treating each part independently, calculate basic and diluted earnings per share for fiscal 2017.
Solution 17-68
Part A
Weighted average common shares and basic EPS
Date # shares Fraction of year

Aug 1, 2016 100,000 8/12 66,667
Mar 31, 2017 150,000 4/12 50,000
Total 116,667
Basic EPS = $950,000 ÷ 116,667 = $8.14
Diluted EPS Calculation

Effect of conversion rights
Interest expense for year on convertible bond—$5,000,000 x 5% $250,000

Income tax reduction due to interest—30% (75,000)
Interest expense avoided, net of tax 175,000
Number of common shares issued assuming conversion on Aug 1 100,000
Less: Portion actually converted on Mar 31 (16,667)
Incremental effect of conversion option 83,333
Per share effect = $175,000 ÷ 83,333 2.10
Therefore, potentially dilutive

Recalculate EPS
Income available to
common shareholders WACS
Basic EPS $950,000 116,667
5% convertible bond 175,000 83,333
Total 1,125,000 200,000
Therefore, diluted EPS is $1,125,000 ÷ 200,000 = $5.63
Part B Weighted average common shares and basic EPS
Date # shares Fraction of year WACS

Aug 1, 2016 100,000 2 ÷ 12 16,667
Sep 30, 2016 110,000 10 ÷ 12 91,667
Total 108,333
Basic EPS = ($950,000 – ($2 x 80,000)) ÷ 108,333 = $7.29
Diluted EPS Calculation

Effect of conversion rights
Preferred share dividend for year avoided $160,000
Number of common shares issued assuming
conversion on Aug 1 (100,000 ÷ 2) 50,000
Less: Portion actually converted on Sep 30/16 (10,000)
Incremental effect of conversion option 40,000
Per share effect = 160,000 ÷ 40,000 = 4.00
Therefore, potentially dilutive

Recalculate EPS
Income available to
common shareholders WACS
Basic EPS $790,000 108,333
Convertible preferred shares 160,000 40,000
Total 950,000 148,333
Therefore, diluted EPS is $950,000 ÷ 148,333 = $6.40
Difficulty: Hard
structure.

The following data are presented by Quentin Corp. for calendar 2017
Net income $4,500,000
Common shares outstanding, 1,000,000 shares
10%, cumulative preferred shares, convertible into 120,000 common shares $1,600,000
8% convertible bonds; convertible into 105,000 common shares $7,500,000
360,000 call options exercisable at $25 per share
Additional information
1. The common and preferred shares and the convertible bonds were outstanding from the
beginning of the year.
2. In 2017, a $500,000 dividend was declared and distributed; however, no dividends were
declared in 2016.
3. The average market price of the common shares in 2017 was $30. The stock price was $27
on January 1, 2017, and $35 on December 31, 2017.
4. The convertible bonds were sold at par.
5. The income tax rate for 2017 is 30%.
Instructions
a) Calculate basic EPS.
b) Calculate diluted EPS.
c) Briefly discuss the usefulness of the EPS measure in general. What is the additional
importance of reporting diluted EPS?
Solution 17-69
a) Basic EPS = (4,500,000 – 160,000) ÷ 1,000,000 = $4.34
b)
Denominator Numerator EPS
Start 1,000,000 $4,340,000 $4.34
Options 60,000* 0
EPS after step 1 1,060,000 4,340,000 4.09
Convertible preferred shares 120,000 160,000 1.33
EPS after step 2 1,180,000 4,500,000 3.81
Convertible bonds 105,000 420,000** 4.00
1,285,000 $4,920,000 3.83 antidilutive!
* 360,000 – (25 ÷ 30 × 360,000) = 60,000

** ($7,500,000 ×.08) × (1 –.30) = 420,000
Since the bonds are antidilutive, they are not included in the calculation, and diluted EPS =
$4,500,000 ÷ 1,180,000 = $3.81
c) EPS in general provides investors with the information on how much of the earnings each
common share earned in the current year. This informs investors how much of the firm’s
earnings they “own” and will help them in predicting future dividend payouts. Diluted EPS
provides shareholders with a more realistic picture of the future EPS as it also considers
complex financial instruments that are not common shares yet, but are likely to be converted
into common shares, which will lower the current shareholder’s share of the earnings. Diluted
EPS can also be viewed as a “worst case” scenario for the current shareholders.
Difficulty: Hard
structure.
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Copyright © 2016 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
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transmitted in any form or by any means, electronic, mechanical, photocopying,
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the sea. At present, our timber resources are practically inaccessible
by railroad.”
Speaking of the possibilities of this East African colony, it may be
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been set out not far from here are doing well. There is one coffee
estate within five miles of Nairobi which belongs to the Catholic
Mission of the Holy Ghost. Yesterday I rode out on horseback over
the prairie to have a look at it. The way to the estate is through
fenced fields, which are spotted here and there with the sheet-iron
cottages of English settlers. As I rode on I saw many humped cattle
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the red soil, although not much cultivated as yet, seems rich.
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like fifteen acres, and has now more than eight thousand trees in full
bearing. The yield is so good that the plantation is supplying not only
the town of Nairobi with all the coffee it needs, but is shipping
several tons every year to Europe. Father Burke tells me that the
coffee trees begin to bear at a year and a half, and that they are in
full bearing within about four years. As the ripening season is long,
the berries have to be picked many times. I saw blossoms and green
and ripe berries on the same tree. In one place the natives were
picking, at another they were hoeing the plants, while in a third place
they were pulping the berries in a pulper turned by hand. The trees
seem thrifty. Father Burke says that the young plants grow easily,
and that where the birds carry the berries away and drop the seeds
the plants will sprout up of themselves. There is a plantation near by
of thirty thousand trees, and I am told that there is a fair prospect of
a considerable coffee industry springing up.
Contact with the white man’s institutions of work, wages, and money usually
leads to an interest in clothing. The demand from East Africa will some day add
millions of yards of cotton cloth to the output of American mills.
The Kikuyus are highlanders and number more than a million. The men coat
their bodies and fill their hair with rancid fat and coloured clay, giving themselves a
weird appearance and a worse smell.
Cattle are the wealth of such tribes as the Masai, who own great numbers of
them. The young men especially covet them, for cattle buy them brides.
Sometimes the horns measure fifty-four inches from tip to tip.
I saw many Negroes at work in the fields. They were Kikuyus, and
were really fine-looking fellows. They were clearing up new ground,
chopping down the weeds with mattocks, and digging up the soil and
turning it over. The sweat stood in beads upon their brows and backs
and ran down their bare legs. I asked the priest what wages they got,
and was told that they each received the equivalent of about five
cents for a day of ten hours. I suggested to the reverend father that
the pay was small, but he said that the natives could not earn more
than that sum and even at those wages it was difficult to keep them
at work.
I hear this same statement made everywhere. The English people
here think that the native Africans are well enough paid at the rate of
a half cent per hour or of a rupee per month. If you protest they will
say that that sum is sufficient to supply all the wants of a black man
and ask why he should be paid more. Think of it, ye American toilers
who belong to our labour unions. Think of five cents a day for
carrying bricks or stone, for chopping up ground under the eyes of a
taskmaster, or for trotting along through the grass, hour after hour,
with a load of sixty pounds on your head! Think of it, and you may
get an idea of how the English white man here is carrying the black
man’s burden! Indeed, as the Frenchman says, “it is to laugh!”
CHAPTER XXXIII
WITH THE BIG-GAME HUNTERS
Kenya Colony is in the land of big game, and Nairobi is the chief
place where parties are fitted out for hunting. As I write this chapter
several large parties are here preparing to go out “on safari,” as such
hunts are called. The Norfolk Hotel is filled with hunters and behind it
are scores of black, half-naked porters and tent boys, packing
sporting goods into boxes, laying in provisions and arranging things
for the march. There are headmen rounding up the porters and
giving each his load. There are gunbearers seeing to the arms and
ammunition, and there are the sportsmen themselves, some clad all
in khaki, some wearing riding breeches and leggings, and all in thick
helmets.
First in the normal personnel of a safari comes the headman, who
is supposed to be in full charge, except for the gunbearers and tent
boy, who are personal servants and under the immediate direction of
their masters. The askaris are armed soldiers to guard the camp at
night and look after the porters on the route. There is one askari to
every ten or twenty porters. The cook has a staff of assistants. Each
sportsman’s tent boy must look after his tent and clothing and serve
him at meals. The syces, or pony boys, look after the horses and
equipment.
In the big yard upon which my hotel rooms look I can see piles of
tusks, heads, horns, and skins brought in by parties which have just
returned, and in one corner is the baby lion whose roars have
pestered my sleep. Among the hunters are several eminent and
titled English men and women, some of the latter having come out to
try a shot at a lion or so. During this last year two women have shot
lions here, and one of the biggest man-eaters ever killed in East
Africa came down through a bullet from a gun in the hands of an
American girl.
There is so much game that almost any one who goes out can
bring back something. Last year’s bag, numbering many thousand
head, was shot by sportsmen from England, France, Germany,
Austria, Italy, India, Australia, North America, and New Zealand. We
have all read the stories of Theodore Roosevelt who shot lions and
elephants here and in Uganda, and we know that British East Africa
has supplied the Chicago Museum and the National Museum at
Washington with some of their finest zoölogical specimens.
The hunting laws here are rigid. No one can shoot without a
license, and the man who kills young elephants, cow elephants, or
baby giraffes will pay a big fine and spend a long term in jail.
Shooting big game is regulated by license.
The sportsman’s license, with certain restrictions, gives the right to
shoot or capture two bull buffaloes, four lions, one rhinoceros, two
hippopotami, ten Colobi monkeys, four marabout, and a limited and
specified number of other game, such as antelope, bongos,
reedbucks, and cheetahs. A special license costing a hundred and
fifty rupees, about fifty dollars, is required for one elephant, while the
privilege of killing two elephants costs three times as much. Only two
elephants are allowed every year. It costs fifty dollars to get a permit
to kill or capture a giraffe and the hunter is allowed only one a year.
A traveller’s license, available for a month, costs five dollars and
gives the right to kill or capture four zebra and not over five
antelopes out of eight named varieties. Animals killed on private land
on either the traveller’s or sportsman’s license do not count in the
total authorized. A register must be kept of all kills or captures under
license. As for leopards and crocodiles, no permit is required to
shoot them.
“Some of the zebras are within pistol shot of my train. Their black and white
stripes shine in the sunlight. They raise their heads as the train passes, then
continue their grazing.”
While game is abundant it is also protected by rigid laws. Every hunter must
have a license and none may shoot more than four lions. A special license is
required to kill the maximum of two elephants a year.
Sportsmen of a dozen different nationalities come here every year to hunt the
giraffes and all sorts of other big game, which is so plentiful that almost any one
can get something. Women are often included in the hunting parties.
There is such a great variety of game that there is no need of
chasing over the swamps or tramping about over the plains for days
before one gets a shot. One sees a dozen different kinds of beasts
on the plains at the same time, and can change his sport from day to
day. The sportsman will find antelopes almost everywhere and will
not infrequently be in sight of an ostrich or so. These birds are big
game and are hunted largely on ponies. They are very speedy, and,
however it may be elsewhere, here they do not poke their heads
down in the sand and wait for the hunter to come. On the other hand,
they spread out their wings and go off on the trot, swimming, as it
were, over the ground. They can run faster than a horse, but they
actually run in large circles and the hunters catch them by cutting
across the arcs of the circles or running around in smaller circles
inside. It is a great thing here to shoot a cock ostrich in order that
you may give your sweetheart or wife the beautiful white feathers
from his wings.
And then there is the zebra! His black and white stripes shine out
so plainly in the brilliant sun that he is to be seen by the thousand on
the Athi plains, and not far from the railroad all the way from Voi to
Uganda—a distance greater than from New York to Pittsburgh. Had
it not been against the law, I could have picked off some with my
revolver as I rode through on the cars. The zebra is rather shyer
when found far from the railroad, but on the whole he is easy to kill.
Away from the game reservations on the railroad he will run like a
deer, and as zebras usually go in droves the excitement of following
them over the plain is intense. Zebra skins tanned with the hair on
are fine trophies, and I am told that zebra steak is excellent eating.
The flesh tastes like beef with a gamier flavour. The animals are so
beautiful, however, and so much like horses, that only a brute would
kill them for sport.
In hunting elephants many a sportsman makes enough to pay a
good share of his African expenses. He can shoot only two bull
elephants, but if he gets good ones their four tusks may bring him
fifteen hundred or two thousand dollars. The African elephants have
the largest tusks of their kind. I have seen some which weighed one
hundred and fifty pounds each, and tusks have been taken which
weigh up to two hundred pounds. African ivory is the best and
fetches the highest prices. It is difficult to get the tusks out. The
porters may be half a day chopping away the meat, and it will take
about four men to carry a tusk of the size I have mentioned. There
are men here who hunt elephants for their ivory, but most of the
licenses are issued to sportsmen, who care more for the honour of
having made a good shot than anything else.
One of the best places to shoot an elephant is through the eye or
halfway between the ear and the eye. Another good shot is just back
of the flap of the ear, and a third is in a place on one side of the tail
so that the ball will run along the spine and enter the lungs. Large
bullets and heavy guns are used. When the animal is close it is
exceedingly dangerous to shoot and not kill. When injured the
elephant is very revengeful. He will throw his trunk into the air,
scream, hiss, and snort and rush after the hunter, knocking him
down with a blow of his trunk and charging upon him with his great
tusks. If the man falls, the huge beast is liable to kneel upon him and
mash him to a jelly.
One of the difficulties of hunting elephants is the fact that it is not
easy to distinguish them in the woods, as they are of much the same
colour as the trees. A traveller here tells me that he once almost
walked into a big elephant while going through the forest. He was
stooping down and looking straight before him when he saw the
beast’s legs and took them for tree trunks.
The average elephants of this region can easily make six miles an
hour while on the march. They usually travel in herds, young and old
moving along together. Notwithstanding their enormous weight, the
animals can swim well, and can cross the largest rivers without any
trouble.
Most of those which used to overrun these plains have been
driven away and must now be hunted in the woods; but there are
plenty in the forests between here and Uganda, and about the
slopes of Mt. Kenya and Mt. Kilimanjaro. There are also many in the
south near the Zambezi, and west of Lake Tanganyika, in the forests
along the Congo. Some years ago they were being killed off at such
a rapid rate, and the ivory output was decreasing so fast, that strict
rules for their preservation were inaugurated and are being enforced.
As for hippos and rhinos, there are plenty of them still left along
the streams and about the great lakes of the tropical parts of the
continent. There are rhinoceroses almost everywhere in the woods
between Nairobi and Uganda. I have seen a number of hippos, and
were I a hunter, which I am not, I could, I venture to say, bag enough
of their hides to make riding whips for all the hunt clubs of Virginia.
The settlers tell me the animals come in and root up their gardens,
and that it is almost impossible to fence against them.
Both rhinos and hippos are hard to kill. Each has a skin about half
an inch thick, and there are only a few places upon them where a
ball will go through. Hippos can be hunted in boats on the lakes, but
they swim rapidly and dive deep, remaining under the surface a long
time. They move along through the water, showing only their ears
and nose. They are so wary that it is difficult to get a shot at just the
right place. One of the best points at which to aim is under the eye or
back of the head between the ears. These animals are sometimes
harpooned, but such hunting is dangerous, as they are liable to
crush one’s boat.
The rhinos also have to be approached very carefully. They have a
keen sense of smell, although they cannot see to any great distance
and their hearing is not good. They are usually hunted on foot, and
one must be careful to get on the windward side of them. A
rhinoceros does not hesitate to charge an enemy. He uses the great
horn on his nose, which is a terrible weapon, and enables him to kill
a horse at one blow. Most of these beasts are black, but now and
then a white one is found. I met a man the other day who claimed to
have killed a white rhinoceros.
Since I have been in Africa I have received a number of letters
from American sportsmen asking the cost of shooting big game in
this part of the world. The question is hard to answer. It depends on
the man and to some extent on the bargains he makes. There are
business firms in Nairobi and in Mombasa which specialize in
outfitting hunting parties, making all arrangements for guides, food,
and porters somewhat as Cook does for tourists. The prices, in such
cases, depend upon the length and character of the tour and the size
of the party. There is a young American here now whose mother
calls him “Dodo,” who paid five hundred dollars for a three days’ hunt
after leopards, and this did not necessitate a permit, as they are on
the free list. The young man tramped about with his porters through
the tall grass, and was given a shot or so at two leopards, both of
which he missed. Had he tried for big game it would have cost him at
the least two hundred and fifty dollars more.
On a long hunt the expenses of all kinds can be considerably
reduced, and I should think that forty dollars a day for each
sportsman in the party would be a fair estimate. I am told that a man
can be fitted out with porters, gunbearers and personal servants for
two hundred and fifty dollars a month. One can get a good cook for
from five to eight dollars a month, a gunbearer for about ten dollars,
and a personal servant for from eight to ten dollars.
The question of provisions for the trip depends much upon the
tastes of the individual sportsman. There are native villages almost
everywhere at which some fresh food can be bought at cheap rates.
Chickens are plentiful at eight cents a pound and meats cost the
same. In the streams and lakes there are fish; the guns of the party
ought to supply plenty of game; and one need never suffer for the
want of antelope or zebra steak.
Other food should be packed up in boxes of sixty pounds each;
and in case the outfit is prepared at Nairobi, each box will have
sufficient for one man’s requirements for one week. Most of the stuff
is in tins, and usually includes plenty of Chicago canned beef,
Canadian bacon, and London biscuits, jams, and marmalades. Such
boxes are labelled with numbers, No. 1 containing the first week’s
supply, No. 2 the second week’s, and so on. Each box weighs just
sixty pounds, as no more than that can be carried on the head of one
porter.
I would advise the American sportsman who intends coming out
here to shoot, to stop off on the way in England for most of his
supplies. Several London firms make a specialty of outfitting for
African travel and for hunting expeditions. One should have double-
roofed tents, the square tents being the best. It will be well to bring a
mackintosh or rubber blanket, one foot wider all around than the floor
of the tent, for many of the camps may be soggy and marshy. One
should also have a folding bedstead, a cork bed, and warm blankets.
A folding chair and table will not be found amiss.
CHAPTER XXXIV
AMONG THE KIKUYUS AND THE NANDI
Shortly after leaving Nairobi by train for Lake Victoria I came into
the land of the Kikuyus, where I stopped off for a while. Over a
million of these native people live in the country about two thousand
feet above Nairobi. We could see their farms and villages
everywhere as we rode by on the railway. In clearing the land they
first burn off the trees and other vegetation, then work the ground
until it is barren. After that they clear more land, letting the first tracts
lie fallow until Nature revives them. Some of the Kikuyu farms are no
bigger than a bed quilt; others cover a quarter of an acre, and some
twice as much. The fields are not fenced, and now and then a rhino
or hippo gets in and wallows, while near the woodlands the monkeys
pull up the crops. The chief thing raised is Indian corn.
The dress of the Kikuyus consists mostly of grease, clay, and
telegraph wire. The grease makes their brown skins shine, the red
clay gives it a copper hue, and the telegraph wire loads their arms,
necks, and ankles. The grease is usually mutton fat and the clay is
the red earth found everywhere. The more rancid the fat the better
they seem to like it. The average man or woman so smells to heaven
that one can distinguish a native’s existence long before he sees
him. They soak their hair with this tallow until under the tropical sun
you can almost hear the stuff sizzle. They stiffen their hair with clay
so that it can be put up in all sorts of shapes. I examined one man’s
head the other day. It was a pale brick-rust colour and covered with
something like ten thousand individual curls which stood out over his
pate like the snakes of the Medusa. Each curl was an inch long and
had been twisted by a professional hairdresser.
This man had six long pipe stems in his ears. Each was as big
around as a lead pencil and about the same length, and was
fastened through a hole made in the rim of the ear by a kind of brass
button. These stems standing out at the sides of his head looked
almost like horns, save that they projected from the ears. He had
beads in the lobes. One of the men with him had the lobe of his ear
so stretched that it held a plug as big as an apple. I bought the plug
of him for three cents, and the man then took the two lobes of his
ears and joined them together under his chin, tying them there with a
bit of fibre in order that they might not catch on a branch as he went
through the forest.
The Kikuyus live in small villages that look like collections of
haycocks until one comes close to them. When one gets inside he
finds they contain as many animals as men. The houses are
thatched huts built about six feet apart in circles around an inclosure
in which the cattle, sheep, and goats are kept at night. The sheep
and goats often get inside the huts. Each circle of houses usually
belongs to one family, a chief and his relatives thus living together.
The huts have wooden walls about four feet high with conical roofs.
The boards, which are about eighteen inches or two feet wide, are
chopped out of the trees with the native axes. A native and his wives
will require about ten days to build a shelter. The wood used is soft,
and the kind is regulated by the government, which charges sixty-six
cents for enough lumber to build one shack.
From the Uganda and Kenya jungles thousands of pounds of ivory go down to
Mombasa. The best tusks come from the uplands of British East Africa, and the
ivory from one bull elephant may pay a hunter’s expenses.
The Kikuyu woman, as in most African tribes, is privileged to do all of the work.
When going to the fields she often carries her baby in a sort of pouch, or sling,
suspended from her shoulders.
Besides its huts, each family has two or three granaries for its
supply of Indian corn. These are made with thatched roofs, wicker
walls and wicker floors, and are raised a foot or eighteen inches off
the ground. They are usually about as big around as a hogshead
and six feet high.
The Kikuyus are practically vegetarians. They live on corn, beans,
sweet potatoes, and a kind of millet. They have a few cattle and
some sheep, but they consider them too valuable to be slaughtered
and only eat them when the cattle are sick or become injured in
some way and have to be killed. They have no chickens, and eat
neither fowls nor eggs. This is because, in the past, the crowing of
cocks would give away the locality of a village, thereby bringing
down its enemies and the slave traders upon it.
These people have many dishes like ours. They eat roasting ears
off the cob, and they boil beans and corn together to make a kind of
succotash. They have also a gruel made of millet and milk, and if
one of the family becomes sick he is sometimes given mutton broth.
In their cooking they use clay jars which they rest upon stones above
fires built on the ground. They use gourds for carrying milk and
water, and bags of woven bark ranging in size from a pint to four
bushels are used for all sorts of purposes. The larger ones serve for
the transportation of their grain to the markets.
The Kikuyu looks upon the females of his family as so much
available capital. If a man has fifteen or twenty wives, he is
supposed to be rich beyond the dreams of avarice. I hear that many
of the chiefs have a dozen or more, and that since the British have
begun to exploit the forests, the more industrious of the native men
have been rapidly increasing their families. A good girl, large and
healthy, will bring as much as fifty sheep. A maiden is supposed to
be ready for sale at twelve years, and twenty dollars in cattle or
sheep is an average price. For this sum the woman should be large,
well formed, and fairly good looking. Homely or lean girls go cheap
and often remain single, in which case they have to work for their
parents. A man may pay down ten sheep and agree to bring in the
balance from month to month as he and his wives earn the money
for them. He goes into the woods and cuts down trees, being paid so
much per stick. If he works hard, he may make three or four dollars a
month, and if, in addition, he has several women to help him, his
income may be doubled or trebled.
In such work the men cut the wood and the women carry it on their
backs to the market. They are loaded up by their husbands, a piece
of goat skin separating the rough sticks from the woman’s bare skin,
and the burden being tied on by a rope of vines which rests on the
forehead. In addition to this goat skin on her back, the woman
usually has an apron or skirt of skin tied about the waist and
reaching to the knees and sometimes below them. A strong, lusty girl
can carry as much as two hundred pounds of wood in this way, and
her husband does not scruple to pile on all she can take.
In coming from the plains over the mountains into the Great Rift
Valley I rode for miles through the woods and had a chance to see
what the British Government is doing to save the forests.
The wooded area of Kenya extends over three thousand two
hundred square miles, of which the tropical forest covers about a
hundred and eighty-three square miles, the remainder being upland
or highland, containing valuable trees. Transportation facilities are so
limited, however, and much of the country is so little known that the
British have only made a good beginning in exploiting the timber
resources and in scientific forestry work.
Lumber is high. Leaving the Kikuyu hills, one finds that there are
woods all the way to the ridge known as the Escarpment and they
extend for some distance down the sides of the Rift Valley. Here in
the valley itself the country is mostly pasture and there is no timber
of any account. In the forest region above referred to the woods are
thin, and in many places the original growth has been cleared by the
Kikuyus. The government is now prohibiting their practice of burning
the wood, and doing all it can to save the trees remaining and to
build up new wood lands. I met at Naivasha an Australian, one of the
heads of the forestry department, who told me that the government
had nurseries at Mombasa, Nairobi, Escarpment, and Landaivi. Near
Mombasa they are setting out teak trees, while at Nairobi they have
planted a large number of acacia and eucalyptus trees, imported
from Australia. The eucalyptus grows well at Nairobi. I saw trees
there seventy-five feet high although they were only five years old.

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Intermediate Accounting Volume 2

Canadian 11th Edition Kieso Test Bank

Intermediate Accounting Volume 2 Canadian 11th Edition

Intermediate Accounting Volume 2 Canadian 9th Edition

Intermediate Accounting Volume 2 Canadian 10th Edition

Intermediate Accounting Volume 2 Canadian 12th Edition

Intermediate Accounting Volume 2 Canadian 10th Edition

Intermediate Accounting Volume 1 Canadian 11th Edition

Intermediate Accounting Volume 1 Canadian 11th Edition

Intermediate Accounting Volume 1 Canadian 10th Edition

5. Understand how analysis helps users of financial statements assess performance.

MULTIPLE CHOICE—Computational (Cont’d)

3. Diluted EPS is only required when

4. Standard setters require the EPS calculation be included

9. Under IFRS, common shares are also called

10. Which of the following statements is INCORRECT?

14. Dilutive convertible securities must be used in the calculation of

assumed reacquired as the potential dilution of earnings per share.

19. Antidilutive securities

21. The reverse treasury stock method is used for

22. Which of the following statements is correct?

b) sustainable cash flow or earnings can be used.

38. Information concerning the capital structure of Shepherd Corporation follows

46. Information concerning the capital structure of Shelmardine Corporation follows

Ex. 17-51 EPS calculations

Ex. 17-52 EPS disclosures under IFRS

Ex. 17-53 EPS presentation

Ex. 17-54 Weighted average of common shares outstanding

Ex. 17-55 Earnings per share

d) Diluted earnings per share

Ex. 17-56 Basic and diluted earnings per share

Incremental effect of conversion of bonds

Ex. 17-57 Basic and diluted earnings per share

Diluted earnings per share

Ex. 17-58 Effect of dilutive securities on earnings per share calculations

2. The second instrument is an example of contingently issuable shares, contingent on profits

Ex. 17-59 Diluted earnings per share

Ex. 17-60 Company valuation Using EPS

Ex. 17-61 Assessing performance using EPS

Use the following information to answer Pr. 17-62–17-63.

2017 2016 2015

Pr. 17-62 Weighted average calculations

2016: (300,000 x 12 ÷ 12) = 300,000

2017: (300,000 x 2 x 6 ÷ 12) + (600,000 x 3 ÷ 12) + (700,000 x 3 ÷ 12) = 625,000

Pr. 17-63 Basic earnings per share

Pr. 17-64 Diluted earnings per share

The corporation reported $750,000 net income for calendar 2017.

Net Adjust Adjusted Adjust Adjusted

Pr. 17-65 Basic and diluted earnings per share

Transactions in Common Shares Change Cumulative

8% Cumulative Convertible Preferred Shares (no par)

Jan 1- Feb 29 1,000,000 x 2/12 x 2= 333 333

Additional shares for purposes of diluted earnings per share

Pr. 17-66 Basic and diluted earnings per share

Weighted average shares outstanding

Jan 1- Mar 31 76,000 x 3/12= 19,000

Basic earnings per share: $372,000 ÷ 102,000 = $3.65

Diluted earnings per share: $372,000 ÷ (102,000 + 50,000) = $2.45