Maria Claudine B. Fortaliza.

CHAPTER 30

DILUTED EARNINGS PER SHARE

Convertible preference shares

Convertible bonds payable

1. (AICPA ADAPTED)

Cox Company had 1,200,000 ordinary shares outstanding on January 1 and December
31, 2015. In connection with the acquisition of a subsidiary in June 2014, the entity is
required to issue 50,000 additional ordinary shares on July 1, 2016 to the former owners
of the subsidiary. The entity paid P200,000 annual preference dividend in 2015 and
reported net income of P3,400,000 for the year. The preference share capital is
noncumulative and nonconvertible?

What amount should be reports as diluted earnings per share?

a. 2.83

b. 2.72

c. 2.67

d. 2.56

Solution: Answer D

Ordinary shares outstanding 1,200,000

Potential ordinary shares to be issued

in the acquisition of subsidiary 50,000

Total ordinary shares 1,250,000

Net income 3,400,000

Preference dividend (200,000)

Net income to ordinary shares 3,200,000

Diluted earnings per share (3,200,000 / 1,250,000) 2.56

2. (AICPA Adapted)

Dunn Company had 200,000 ordinary shares of P20 par value and 20,000 shares of
P100 par, 6% cumulative, convertible preference share capital outstanding for the entire
year ended December 31, 2015. Each preference share is convertible into 5 ordinary
shares. The net income for the current year was P840, 000.

What amount should be reported as diluted earnings per share?

a. 2.40

b. 2.80

c. 3.60

d. 4.20

Solution: Answer B

Ordinary shares outstanding 200,000

Potential ordinary shares to be issued for conversion

of preference shares (20,000 x 5) 100,000

Total ordinary shares 300,000

Diluted EPS (840,000 / 300,000) 2.80

3. (IAA)

Vios Company had 100,000 ordinary shares outstanding on January 1, 2015. In

addition, on January 1, 2015, the entity had issued 10,000 convertible cumulative 5%
preference shares with P100 par. These preference shares were converted on
September 1,2015. Each preference share was converted into six ordinary shares. The
preference dividends for the entire year were paid in full before the conversion. The
entity has no other potentially diluted securities. Net income for the current year was
P2, 000,000.
What amount should be reported as diluted earnings per share?

a. 12.50

b. 12.19

c. 16.25

d. 19.50

Solution: 3 Answer A

January 1 Outstanding 100,000

September 1 Conversion (100,000x 6) 60,000

Total ordinary shares 160,000

Diluted EPS (2,000,000 / 160,000) 12.50

4. (AICPA Adapted)

On January 1, 2015, Lex Company had 600,000 ordinary shares outstanding. On April
1, 2015, an additional 180,000 ordinary shares were issued for cash. The entity also
had P5,000,000 of 8% convertible bonds outstanding during 2015, which are convertible
into 150,000 ordinary shares. The bonds are diluted in the 2015 earnings per share
computation. No bonds were issued or converted into ordinary shares during 2015.

What is the number of shares that should be used in computing diluted earnings per
share?

a. 735,000

b. 780,000

c. 885,000

d. 930,000
Solution: Answer C

Ordinary shares outstanding on January 1 600,000

Ordinary shares issued on April 1 (180,000 x 9/12) 135,000

Potential ordinary shares to be issued for bond conversion 150,000

Total ordinary shares 885,000

5. (AICPA Adapted)

Petrock Company provided the following information at year-end:

2014 2015

Ordinary share capital 90.000 shares 90,000 shares

Convertible preference share capital 10,000 shares 10,000 shares

During 2015, Petrock paid dividends of P1.00 per ordinary share and P2.40 per
preference share. The preference share capital is convertible into 20,000 ordinary
shares. The net income for 2015 was P285, 000. The income tax rate was 30%.

What amount should be reported as diluted earnings per share for 2015?

a. 2.53

b. 2.61

c. 2.90

d. 2.59

Solution: Answer D

Net income 285,000

Preference dividends (10,000 x 2.40) (24,000)

Net income - ordinary 261,000

Basic EPS ( 261,000 / 90,000 ) 2.90

Ordinary shares outstanding 90,000

Potential ordinary shares- convertible preference 20,000

Total ordinary shares 110,000

Diluted EPS (285,000 / 110,000) 2.59

6. (IAA)

On January 1, 2015, Frown Company had 2,000,000 ordinary shares outstanding. On

July 1, 2015, the entity issued 500,000 preference shares which were convertible into
300,000 ordinary shares. During the year, the entity declared and paid P1,000,000 cash
dividend on the ordinary shares and P800,000 cash dividend on the preference shares.
The net income for the current year was P6,500,000.

1. What amount should be reported as basic earnings per share?

a. 2.85

b. 3.25

c. 2.35

d. 2.25

2. What amount should be reported as diluted earnings per share?

a. 2.85

b. 3.02

c. 2.83

d. 1.75

Solution: #1 Answer A

Net income 6,500,000

Preference dividend (800,000)

Net income - ordinary 5,700,000

Basic EPS (5,700,000 / 2,000,000) 2.85

Solution: #2 Answers A

January 1- Share outstanding 2,000,000

July 1- Potential ordinary shares (300,000 x 6/12) 150,000

Average ordinary shares 2,150,000

Diluted EPS (6,500,000 / 2,150,000) 3.02

The effect of the convertible preference shares is increase in EPS and therefore
untidilutive.

Thus, the diluted EPS should the same as basic EPS of P2.85

7. (AICPA Adapted)

On June 30, 2014, Lomond C ompany issued 20, P10,000, 7% bonds at face value.
Each bond was convertible into 200 ordinary shares. On January 1, 2015, 10,000
ordinary shares were outstanding. The bondholders converted all the bonds on July 1,
2015. The net income for the current year was P35,000. The tax rate is 30%.

What amount should be reported as diluted earnings per share?

a. 2.50

b. 2.85

c. 2.92

d. 3.00

Solution: Answer B

Ordinary shares outstanding 10,000

bond conversion on July 1 (20x200) 4,000

Total ordinary shares 14,000

Net income 35,000

Interest on bonds from January 1 to July 1,2015

(200,000 x 7% x 6/12) 4,900

Adjusted income 39,900

Diluted earnings per share (39,900 / 14,000) 2.85

8. (IAA)

On January 1, 2015, Kate Company had 500,000 ordinary shares outstanding. On

October 1, 2015, an additional 100,000 ordinary shares were issued. In addition, the
entity had P20, 000,000 of 6% convertible bonds outstanding on January 1, 2015 which
are convertible into 225,000 ordinary shares. No bonds were converted in 2015. The net
income for the current year was P6, 000,000. The tax rate is 30%.

What amount should be reported as diluted earnings per share?

a. 10.00

b. 9.60

c. 9.12

d. 8.00

Solution: Answer C

Ordinary shares outstanding on January 1 500,000

Ordinary shares issued on October 1 (100,000 x 3/12) 25,000

Potential ordinary shares for bond conversion 225,000

Average ordinary shares 750,000

Net income 6,000,000

Interest on bonds (6% x 20,000,000 x 70%) 840,000

Adjusted net income 6,840,000

Diluted EPS (6,840,000 / 750,000) 9.12

9. (AICPA Adapted)

Bacoor Company had 2,500,000 ordinary shares outstanding on January 1, 2015. An

additional 500,000 ordinary shares were issued on April 1, 2015, and 250,000 more on
July 1, 2015. On October 1, 2015, the entity issued 5,000, P1,000 face value, 7%
convertible bonds. Each bond is convertible into 40 ordinary shares. No bonds were
converted into ordinary shares in 2015.

1. What is the number of shares that should be used in computing basic earnings per
share?

a. 3,000,000

b. 2,875,000

c. 2,925,000

d. 3,200,000

2. What is the number of shares that should be used in computing diluted earnings per
share?

a. 2,500,000

b. 3,050,000

c. 2,625,000

d. 3,250,000

Solution: #1 Answer A

January 1 (2,500,000 x 12/12) 2,500,000

April 1 (500,000 x 9/12 ) 375,000

July 1 (250,000 x 6/12) 125,000

Average shares - Basic EPS 3,000,000

Solution: #2 Answers B

January 1 2,500,000

April 1 375,000

July 1 125,000
October 1 50,000

Average shares - Diluted EPS 3,050,000

10. (IAA)

Fortuner Company had 200,000 ordinary shares outstanding on January 1, 2015, the
entity had issued 4,000 convertible 10% bonds with P1, 000 face value. The bonds
were converted on October 1, 2015 and 40 ordinary shares were issued in exchanged
for each bond. Net income was P5, 000,000. the income tax rate is 30%.

1. What is the amount of basic earnings per share?

a. 25.00

b. 13.80

c. 20.83

d. 15.62

2. What is the amount of diluted earnings per share?

a. 14.47

b. 21.65

c. 14.72

d. 14.61

Solution: #1 Answer C

January 1 Outstanding 200,000

October 1 Conversion (4,000 x 40 x 3/12) 40,000

Average number of shares 240,000

Basic EPS (5,000,000 / 240,000) 20.83

January 1 Outstanding 200,000

October 1 Conversion (4,000 x 40) 160,000

Total ordinary shares 360,000

Net Income 5,000,000

Interest on bonds net of tax from January 1 to October 1

(4,000,000 x 10% x 9/12 x 70%) 210,000

Adjusted income 5,210,000

Diluted EPS (5,210,000 / 360,000) 14.47

11. (IAA)

Atlantic Company had the following capital on January 1, 2015. 8,000,000

Ordinary share capital, P10 par value, 800,000 shares

12% convertible bonds, each P1, 000 bond is convertible into 80

5,000,000 ordinary shares

May 1 Issued 60,000 ordinary shares for P30 per share

July 1 purchased 100,000shares of treasury at P35 per share

Oct. 1 Converted P2, 000,000 face value of bonds

Dec. 1 Net income for 2015 was P9, 500,000. The tax rate is 30%

1. What is the amount of basic earnings per share?

a. 11.45

b. 11.88

c. 10.33

d. 10.80

2. What is the amount of diluted earnings per share?

a. 8.30

b. 8.44

c. 8.33

d. 8.48
Solution: #1 Answer A

January 1 Outstanding 800,000

May 1 (60000 x 8/12) 40,000

July 1 (100,000 x 6/12) (50,000)

October 1 (2,000 x 80 x 3/12) 40,000

Average number of shares 830,000

Basic earnings per share 11.45

Solution: #2 Answers A

January 1 Outstanding 800,000

May 1 (5000 bonds x 80) 400,000

July 1 (60,000 x 8/12) 40,000

October 1 (100,000 x 6/12) (50,000)

Average number of shares 1,190,000

Net income 9,500,000

Interest on bonds actually converted on

October 1 (2,000,000 x 12% x 9/12) 180,000

Interest on bonds not converted

(3,000,000 x 12% ) 360,000

Total interest 540,000

Tax effect (30% x 540,000) (162,000) 378,000

Adjusted income 9,878,000

Diluted earnings per share (9,878,000 / 1,190,000) 8.30

12. (IFRS)

At the beginning of the current year, Bergen Company issued 4,000,000 convertible
bonds at face value of P10 or a total of P40,000,000. The bonds mature in 3 years and
can be converted into two ordinary shares for each bond.

The entity can settle the principal amount of the bonds in ordinary shares or in cash but
the entity is likely to settle the contract by issuing shares.

When the bonds are issued, the interest rate for a similar debt without conversion rights
is 10% and the market value of share is P4.

The profit attributable to ordinary shareholders for the current year is P33, 000,000 and
there are 10,000,000 ordinary shares outstanding during the current year. The income
tax rate is 30%.

The proceeds from the issuance of the bonds are allocated as follows:

Liability component 30,000,000

Equity component 10,000,000

Total proceeds 40,000,000

What amount should be reported as diluted earnings per share?

a. 2.00

b. 1.95

c. 3.30

d. 3.51

Solution: Answer B

Net income 33,000,000

interest on bonds (10% x 30,000,000 x 70%) 2,100,000

Adjusted income 35,100,000

Ordinary shares outstanding 10,000,000

Potential ordinary shares from bond conversion

(4,000,000 x 2) 8,000,000
Total ordinary shares 18,000,000

Diluted earnings per share (35,100,000 / 18,000,000) 1.95

13.

Accenture Company had made a net profit attributable to ordinary shareholders of P2,
000,000 for the year ended December 31, 2015. There are 100,000 ordinary shares
outstanding during the entire year. Since January 1, 2015, there has been P800,000 of
5% convertible loan in issue.

The terms of conversion are for every P10,000 nominal amount as follows:

June 30, 2015 120 ordinary shares

June 30, 2016 150 ordinary shares

June 30, 2017 140 ordinary shares

No conversion is taken place during the current year. The interest on the convertible
loan is allowable for a tax relief of 30%.

What amount should be reported as diluted earnings per share for the year ended
December 31, 2015?

a. 18.11

b. 17.86

c. 18.21

d. 18.24

Solution: Answer A

Net income 2,000,000

interest on bonds (800,000 x 5 % x 70%) 28,000

Adjusted income 2,028,000

Ordinary shares outstanding 100,000

Potential ordinary shares through conversion of bonds

On most favorable terms (800,000 / 10,000 x 150) 12,000

Total ordinary shares 112,000

Diluted earnings per share (2,028,000 / 112,000) 18.11

14. (AICPA ADAPTED)

Riselle Company is calculating earnings per share for inclusion in the annual report to
shareholders. Riselle Company has obtained the following information from the
controller’s office:

Net income from January 1 to Dec. 1 125,000

Number of outstanding per share:

January 1 to March 31 15,000

April 1 to May 31 12,000

June 1 to December 31 18,000

In addition, Riselle has issued 10,000 incentive share options with an exercise price of
P30 to its employees and a year-end market price of p25 per share. What is the amount
of diluted earnings per share?

a. 4.63

b. 4.85

c. 6.94

d. 7.69

Solution: Answer D

January 1 to March 31 (15,000 x 3/12) 3,750

April 1 to May 31 (12,000 x 2/12) 2,000

June 1 to December 31 (18,000 x 7/12) 10,500

Weighted average share outstanding 16,250

Diluted EPS (125,000 / 16,250) 7.69

15. (IFRS)
Mount Banahaw Company had outstanding 20,000 written put options on its ordinary
shares with an exercise price of P350. The average market price of ordinary shares for
the period is P280.

In calculating diluted earnings per share, how many potential ordinary shares should be
included as a result of the written put option?

a. 20,000

b. 25,000

c. 5,000

d. 0

Exercise price (20,000 x P350) 7,000,000

It is assumed that sufficient number of ordinary shares shall be issue at the average
market price to cover the amount of P 7,000,000.

Ordinary shares assumed to be issued

(7,000,000 / P280) 25,000

Ordinary shares to be repurchased under the

Written put options 20,000

Potential ordinary shares 5, 000