Earnings per share

1. Mc Donald had 120,000 of ordinary shares issued and outstanding at January

1,208. On January 2 of the same year, the company issued 80,000 preference
shares. During the year, the company declared and paid P420,000 cash dividend
on the ordinary shares and P240,000 on the preference shares. Net income for the
year was P1,500,000. What should be the basic earnings per share on 2008?

a. P9.00
b. P10.50
c. P12.50
d. P15.75

2. On January 1,2008, Jolly boy, whose stock is publicly traded had 100,000 shares
of ordinary shares issued and outstanding. On April 1,2008, the company issued
10% stock dividends. On September 1,2008, additional 9,000 shares were issued
for cash and on November 1,2008, the shares were split on a 2 for 1 basis.
What is the number of shares to be used in computing earnings per share on
December 31,2008?
a. P119,000
b. P220,000
c. P226,000
d. P230,500

3. Bosero inc. had the following transactions pertaining to ordinary shares during
2008:
January 1 ordinary shares outstanding 30,000
February 1 issued 10% ordinary share dividend 3,000
March 1 issued for cash 9,000
July 1 issued for cash 8,000
TOTAL - December 31 50,000

What should be Bosero’s 2008 weighted average shares outstanding?

a. 40,000
b. 44,250
c. 44,500
d. 46,000

4. The following share capital transactions pertains to Joey de venecia for the year
2008:
January 1 Shares outstanding 44,000
February 1 Shares issued for cash 56,000
May 1 shares reacquired 25,000
August 1 Receipt of 25% stock dividends
September 1 Resold part of treasury share 10,000
November1 Issued 2-for-1 stock split
 What is the weighted average ordinary share outstanding?
a. 187,500
b. 203,333
c. 207,500
d. 250,000

5. On December 31,2007, Sergio co. had 200,000 ordinary shares outstanding with a
par value of P100 per share. In addition, the company had 40,000 shares of 10%
convertible preference shares with a par value of P50 per share. The preference
shares are convertible into 40,000 ordinary shares. On December 31,2008, Sergio
co. reported an after tax income of P800,000 and paid P200,000 and P250,000
dividends to preference and ordinary shares, respectively.
What amounts of earnings per share Sergio co. should report in its December
31,2008 financial statements?
a. Basic Earnings per share of P3.00 only
b. Basic Earnings per share of P4.00 only
c. Basic Earnings per share of P3.00 and Diluted Earnings per
share of P3.33
d. Basic Earnings per share of P4.00 and Diluted Earnings per
share of P3.33

6. GMA TV’s capital structure is shown below:

December 31
2008 2007
Outstanding shares of stock:
Ordinary 110,000 110,000
Convertible preference 10,000 10,000

During 2008, GMA TV paid dividends of P3.00 per share on its preference share.
The preferred shares are convertible into 20,000 shares of ordinary share. Net
income for 2008 was P850,000.

Assume that the income tax rate is 32%, how much is the diluted earnings per
share for 2008?
a. P6.31
b. P6.54
c. P7.08
d. P7.45

7. On January 2,2008, Clark Kent issued at par P3,000,000, 5-year , 10% bonds
convertible in total into 200,000 shares of Clark’s ordinary shares. Without the
conversion option, the bonds were selling at the prevailing rate of interest of 12%.
Interest is payable every December 31. No bonds were converted during 2008.
Throughout 2008, Clark had 500,000 shares of ordinary shares outstanding. Clark
Kent’s net income was P5,500,000. Clark’s tax rate is 32%.
 No other potentially dilutive securities other than the convertible bonds were
outstanding during 2008.
For 2008, what is the diluted earnings per share?
a. P7.86
b. P8.18
c. P8.28
d. P11.00

8. On December 31,2008, Evilon corp. has a 200,000 ordinary shares outstanding

with a par value of P100 per share. Information revealed that Evilon had a 9%
convertible debenture, P1,000,000 face value bonds. The bond has a carrying
value of P1, 067,830 as of January 2,2008 based on a prevailing rate of 7%. Each
1,000 bond is convertible into 20 ordinary shares. The bonds were dated January
1,2008. Net income after tax of 32% for 2008. How much should Evilon report as
earnings per share in its December 31,2008 financial statements?
a. P1.90
b. P2.09
c. P2.13
d. P2.89

9. On January 1,2008, Sasuri had 56,000 ordinary shares outstanding that did not
change during 2008 and 2007. Sasuri granted options to certain executives to
purchase 9,000 shares of its ordinary shares at P70 each. The average market price
of ordinary share was P105 per share during 2008. What is the total number of
shares to be used in computing diluted earnings per share for 2008?
a. 56,000
b. 59,000
c. 62,000
d. 65,000

10. WWE showed the following information:

CV of Date
Descriptive of Bonds Liability Issued Conversion Term
10-year 6.5% convertible bonds P700,000 01.01.08 100 shares of ordinary for
each P,000 bond
20-year 7% convertible bonds 1,000,000 01.01.08 50 shares of ordinary for
each P1,000 bond
25-year 10.5% convertible bonds 1,600,000 06.30.08 32 shares of ordinary for
each P1,000 bond

additional information:
Ordinary shares outstanding at December 31,2007 700,000
Net income for 2008 P1,046,000
Income tax rate 32%
 The liability components of the convertible bonds at the time of their issue were
equal to their face amounts.

What is the dilutive earnings per share?

a. P1.37
b. P1.40
c. P1.42
d. P1.49

11. Captain Barbell has the following capital structure at January 1,2008:
Ordinary share, par P10 800,000 shares
Liability compenent of 5-year 10% convertible bonds
Each 1,000 bon is convertible into 80 shares
Of ordinary share P5,162,550
Share premium – conversion option 205,000

The bonds were issued on January 2,2007 and at the time of issue the bonds were
selling at a rate of interest of 9% without the conversion option.

During 2008, Capt. Barbell had the following stock transactions:

May 1 Issued 60,000 shares of ordinary share at P30 per share

August 1 Purchased 120,000 shares of treasury at P35 per share
Dec.31 converted P2,000,000 bonds

Net income for 2008 was P950,000. income tax rate 32%.

How much is the diluted earnings per share?

a. P0.99
b. P1.04
c. P1.06
d. P1.11

12. Suna company had share capital of two million shares P1 each fully paid up. On
January 2,2008 Suna issued one million P1 ordinary shares. The full price of the
new shares was P1.50 and they were 50% paid up on issue. The dividend
pariticipation is to be 50% until fully paid up. The shraes remained 50% paid at
December 31,2008. During the year to December 31,2008 the average fair value
of one ordinary shared was P2.00. Net income for the year was P8,000,000.
What is the basic earnings per share ?
a. 2.67
b. 3.05
c. 3.20
d. 4.00
 What is the diluted earnings per share?
a. 2.67
b. 3.05
c. 3.20
d. 4.00

13. On June 1, 2006, Jonson co. and Marlen co. merged to form Jef inc. A total of
800,000 shares were issued to complete the merger. The new corporation reports
on a calendar year basis.
On April 1,2008 the company issued an additional 400,000 shares of stock for
cash. All 1,200,000 shares were outstanding on December 31,2008.
On July 1,2008 Jef inc., also issued P2,000,000 of 10 year 8% convertible bonds
for P2,300,000. Without out the conversion option, the bonds are selling at a
market rate of interest of 9%. Interest on these bonds are payable every June 30
and December 31. Each 1,000 bond converts to 12 shares of ordinary at any
interest date. None of the bonds have been converted to date.
Jef inc. is preparing its annual report for the fiscal year ending December 31,2008.
The annual report will show earnings per share figures based upon a reported
after-tax net inseam of P1,540,000 (the tax rate is 32%).
How much shares shall be used to determine the diluted earnings per share?
a. 1,080,000
b. 1,100,000
c. 1,112,000
d. 1,200,000
What is the amount of interest expensed to be included in the computation of
diluted earnings per share?
a. none
b. 57,246
c. 80,000
d. 84,166

14. Erik co. has 150,000 ordinary shares outstanding, 10,000 convertible preference
share with a par value of P100 per share that are convertible into 25,000 shares
and an 8% convertible bonds with a face value of P1,000,000 which is equal to its
liability component, convertible into 30,000 ordinary shares. Net income for the
year is P850,000. Income tax rate is 32%.
Assuming the dividend rate of the preference share is 12% what is the diluted
earnings per share?
a. 4.36
b. 4.41
c. 4.80
d. 4.86
Assuming the dividend rate of the preference share is 10% what is the diluted
earnings per share?
a. 4.36
b. 4.41
 c. 4.80
d. 4.86

15. The shareholder’s equity of Joy co. on December 31,2008 shows the following
account balances:

10% Preference share, 5,000 shares,P100 par P500,000

12% Preference share, 6,000 shares, P100 par 600,000
Ordinary share, 10,000 shares, P40 par 400,000
Share premium 320,000
Accumulated profits 480,000

The 10% preference share is cumulative and fully participating, while the 12%
preference share is non-cumulative and fully participating. The last payment of
dividends was on December 31,2006.

What is the book value per share of ordinary shares?

a. 44.00
b. 59.68
c. 60.27
d. 102.80

16. At December 31,2007, PotPot co. had 450,000 shares of ordinary shares
outstanding. On September 1,2008, an additional 150,000 shares of ordinary
shares were issued. In addition, Potpot had P10, 000,000 of 6% convertible bonds
outstanding at December31,2007 which are convertible into 300,000 shares of
ordinary shares. The carrying value of the bonds as of December 31,2007 and
based on a rate of 8% is P9,205,800. No bonds were converted into ordinary
shares in 2007. The net income for the year ended December 31, 2008 was
P3,750,000.

Assuming the income tax rate was 32%. What should be the diluted earnings per
share for the year ended December 31,31,2008 of Potpot co.?
a. 5.20
b. 5.31
c. 5.44
d. 7.50

17. You are auditing the financial statements of Toronto Raptors franchise as of
December 31,2008. The company’s general ledger shows the following liability
and equity accounts at the balance sheet date.

Accounts payable P530,000

Accrued expenses 41,600
Reserve for bond retirement 320,000
Preferred stock, 6% cumulative, P100 par;
 6,000 shares authorized; 4,000 shares issued;
3,700 shares outstanding
(P110 liquidation value per share) 400,000
Common stock, P10 par; 200,000 shares
authorized; 80,000 shares issued and outstanding 800,000
Additional paid in capital 154,600
Retained earnings 262,520
Treasury preferred stock, at cost 36,000

Raptors co. intends to issue additional common shares to finance its plant
expansion program. Common stockholders were notified that they will be
permitted to subscribe to the new issue at P15 per share up pt 50% of their
holdings. Stock warrants were issued on January 13,2009. The market value of
the stock prior to the issuance of the stock warrants was P20 per share.

What is book value of the preferred stock on December 31,2008?

a. 116
b. 115
c. 110
d. 122

What is the book value of the common stock on December 31,2008?

a. 18.47
b. 18.68
c. 18.36
d. 18.40

What is the theoretical value of the stock rights issued by Raptors?

a. 2.50
b. 1.67
c. 20.00
d. 5.00

18. The following information was obtained from the balance sheet of PUP inc. on
December 31,2007:

6% convertible 10year bonds at par P2,000,000

Common stock, P20 par, 110,000 shares
issued and outstanding 2,200,000
Retained earnings 950,000

Each P1,000 bond can be converted into 40 shares of common stock. On

September 30,2008, the bonds were all converted into common stock. PUP
reported net income of P600,000 in 2008.
 What is PUP’s basic earnings per share for 2008?
a. 3.16
b. 4.62
c. 5.07
d. 5,45

What is PUP’s diluted earnings per share for 2008?

a. 3.14
b. 3.63
c. 5,07
d. 3,47

19. Presented below is the stockholder’s equity of the comparative balance sheet of
Pembo co. on December 31,2008 and 2007:

Dec. 31,2008 Dec. 31,2007

12% Preferred stock, P100 par P 165,000 P 135,000

Paid in capital in excess of par – preferred 26,800 18,400
Common stock, P10 par* 821,200 799,200
Paid in capital in excess of par – common 128,600 117,600
Paid in capital from treasury stock 3,600 1,600
Retained earnings 942,400 792,920
Total stockholder’s equity P 2,087,600 P 1,864,720

*Par value after June 1, 2008 stock split

Pembo had 32,500 common stock outstanding at December 31,2006.

The following stockholders’ equity transactions were recorded in 2007 and 2008:

2007
May 1 Sold 4,500 common shares for P24 par value P20
June 30 Sold 350 preferred shares for P124, par value P100
Aug. 1 Issued an 8% stock dividend on common stock. The market
value of the stock was P30 per share.
Sept. 1 Declared cash dividends of 12% on preferred stock
and P3 on common stock
Dec. 31 Net income for the year is P632,400

2008
Jan. 31 Sold 1,100 common shares for P30
May 1 Sold 300 preferred shares for P128
June 1 Issued a 2-for-1 split of common stock. The par value of
common stock was reduced t oP10 per share
 Sept. 1 Purchased 500 common shares for P18 to be held as treasury stock.
Oct. 1 Declared cash dividends of 12% on preferred stock and P4
per share on outstanding common stock
Nov. 1 Sold 500 shares of treasury stock for P22

What is Pembo’s basic earnings per share for 2007?

a. 8.25
b. 8.04
c. 16.07
d. 16.49

What is Pembo’s net income for 2008?

a. 475,960
b. 456,160
c. 497,760
d. 495,760

What is Pembo’s basic earnings per share for 2008?

a. 5.81
b. 6.06
c. 5.82
d. 6.05

20. The following information was obtained from the audited financial statements of
Bangkal co. for the year ended December 31,2008:

Operating revenue P 3,500,000

Selling, administrative, and other operating expenses 1,800,000
Finance cost 250,000
10% Nonconvertible bonds 2,500,000
Income tax rate 35%

Additional data:
 There were 35,000 common shares outstanding throughout the year.
 On January 1,2008, there were options outstanding to purchase 20,000
shares of common stock at P30 per share. The average market price during
the year was P40 per share.

What is Bangkal’s basic earnings per share for 2008?

a. 26.93
b. 31.57
c. 23.56
d. 31.42
What is Bangkal’s diluted earnings per share for 2008?
a. 26.93
b. 23.56
c. 17.14
d. 31.42
ANSWER KEY
1. B
2. C
3. D
4. B
5. A
6. B
7. B
8. B
9. B
10. A
11. C
12. C
13. B
14.
15. B
16. B
17. A D B
18. B D
19. B D A
20. A B
SOLUTIONS:

1. Net income P1,500,000

Less: preference dividend 240,000
Net P1,260,000
Ordinary share outstanding 120,000
Basic earnings per share P 10.50

2. Shares
after
Split up

1/1 Beginning balance 100,000 x 2 = 200,000 x 12/12 200,000

1/1 Stock dividends 10,000 x 2 = 20,000 x 12/12 20,000
9/1 Additional shares 9,000 x 2 = 18,000 x 4/12 6,000
Weighted Average Ordinary Shares Outstanding 226,000

3. Months
Date Shares Unchanged Total
January 1 30,000 x 12 = 360,000
January 1(Feb.1 stock dividend)3,000 x 12 = 36,000
March 1 issued 9,000 x 10 = 90,000
July 1 8,000 x 6 = 48,000
534,000

Weighted average ordinary shares outstanding = 534,000 / 12 = 44,500

4 Total
. 1/1 44,000 x 125% = 55,000 x 2 = 110,000 x 1 = 110,000
2/1 100,000 x 125% = 125,000 x 2 = 250,000 x 3 = 750,000
5/1 75,000 x 125% = 93,750 x 2 = 187,500 x 4 = 750,000
9/1 - - 103,750 x 2 = 207,500 x 4 = 830,000
12 2,440,000

Weighted average shares outstanding 2,440,000 / 12 = 203,333

5. Basic EPS “Assumed Conversion”

Net income P800,000 P800,000
Preference dividends (200,000)
Adjusted net income P600,000 P800,000
Total ordinary shares / 200,000 / 240,000
Earnings per share P 3.00 P 3.33
6. BEPS DEPS
Net income P850,000 P850,000
Preference dividends (30,000) 0
Net P820,000 P850,000
Total ordinary shares / 110,000 / 130,000
Earnings per share P 7.45 P 6.54

7. BEPS DEPS
Net income P5,500,000 P5,500,000
Interest expense net of tax
(see schedule below) 0 227,052
Adjusted net income P5,500,000 P5,727,052
Total ordinary shares / 500,000 / 700,000
Earnings per share P 11.00 P 8.18

Schedule for interest expense:

Issue price of the bonds without the conversion option:
Present value of total future interest P300,000 x 3.605 = P1,081,500
Present value of the face amount P3,000,000 x .567 = 1,701,000
Issue price P2,782,500
Market rate of interest 12%
Total interest expense P 333,900
Net of tax rate (100% - 32%) x 68%
Interest expense net of tax P 27,052

8. BEPS As if Conversion
Net income P418,000 P418,000
Interest expense net of tax
(1,067,830 x 7% x 68%) 0 50,829
Adjusted net income P418,000 P468,829
Total ordinary shares / 200,000 /220,000
Earnings per share P 2.09 P 2.13

9. Assumed exercised and issue of shares 9,000

Less: assumed shares issued if purchase at market price:
Assumed proceeds (9,000 x P70) P630,000
Average market price / 105 6,000
Shares issued (free) for no consideration 3,000
Original outstanding shares 56,000
Total shares to be used in calculating DEPS 59,000
10. Increase in Increase Incremental
Net income in shares EPS
6.5% bonds P30,940 / 70,000 = P0.442
7.0% bonds 47,600 / 50,000 = P0.952
10.5% bonds 57,120 / 25,600 = P2.230

Net No. of
Income shares
DEPS
Simple capital structure P1,046,000 / 700,000 = P1.49
6.5% bonds 30,940 / 70,000
Net P1,076,940 / 770,000 = P1.40
7% bonds 47,600 50,000
Net P1,124,540 / 820,000 = P1.37

11. Net income P 950,000

Interest on dilutive bonds, net(5,162,550 x 9% x 68%) 315,948
Adjusted net income P1,265,948
Weighted average shares 1,190,000
Diluted earnings per share P 1.06

January 1 actual number of shares (800,000 x 12/12) 800,000

January 1 as if all the bonds were converted (400,000 x 12/12) 400,000
May 1 actual issue of the new shares (60,000 x 8/12) 40,000
August 1 treasury (120,000 x 5/12) (50,000)
Average number of ordinary shares 1,190,000

12. Net income P8,000,000

Number of shares for BEPS / 2,500,000
Basic earnings per share P 3.20

Original number of shares 2,000,000

New shares issued: 1,000,000 x 50% 500,000
Number of shares for BEPS 2,500,000

Net income P8,000,000

Adjusted number of shares / 2,625,000
Diluted earnings per share P 3.05

Original number of shares 2,000,000

New shares issued 500,000
Dilutive shares 125,000
Adjusted number of shares 2,625,000

13. Date Shares Average

January 1,2008 800,000 x 12/12 800,000
 April 1,2008 400,000 x 9/12 300,000
July 1,2008 (assumed conversion of bonds) 24,000 x 6/12 12,000
1,112,000

Liability component of the bonds:

Present value of total future interest P2,000,000 x 4% x 13.01 P1,040,800
Present value of the face amount P2,000,000 x .415 830,000
Carrying value of the bonds at the time of issue P1,870,800
Market rate (semi-annual rate) 4.5%
Interest expense for six months P 84,186
Net of tax rate (100% - 32%) 68%
Interest expense net of tax P 57,246

15. 10% 20%

Excess Preference Preference Ordinary
Balance P800,000 P500,000 P600,000 P400,000
With cumulative rights:
(10% x 500,000 x 2yrs) (100,000) 100,000
With non-cumulative rights:
(12% x 600,000) (72,000) 72,000
Current dividends for
ordinary share
(10% x 400,000) (40,000) 40,000
Balance for participation P588,000
10% preference
(5/15 x 588,000) (196,000) 196,000
12% preference
(6/15 x 588,000) (235,200) 235,200
Ordinary
(4/15 x 588,000) (156,800) 156,800
Book value P796,000 P907,200 P596,800
Number of shares / 5,000 6,000 10,000
Book value per share P 159.20 P 151.20 P 59.68

16. Net income P3,750,000

Add: interest expense on bonds
net of tax (9,205,800 x 8% x 68% 500,796
adjusted net income P4,250,796
total shares of ordinary
average 500,000*
issued “as if” converted 300,000 800,000
diluted earnings per share (DEPS) P 5.31
 balance ratio of months average
Jan.1,2008 450,000 12/12 450,000
Sept.1,2008 150,000 4/12 50,000
500,000*

17. Excess
Over par Preferred Common
Balances P731,120* P370,000** P800,000
Preferred dividend
(6% x P370,000) (22,200) 22,200***
Liquidation premium
(P10 x 3,700) (37,000) 37,000
Balance to common P671,920 671,920
Total stockholders’ equity 429,200 P1,471,920
Divide by shares outstanding 3,700** 80,000
Book value per share P 116P 18.40

*computation of “excess over par”

Additional paid in capital as adjusted
(154,600 – 6000) P148,600
Reserve for bond retirement (appropriation
of retained earnings) 320,000
retained earnings 262,250
total P731,120

**Preferred stock
Shares Par value
Issued 4,000 P400,000
Less: treasury stock at par 300 30,000
Outstanding 3,700 P370,000

*** it is assumed that there no preferred dividends in arrears

Computation of theoretical value (TV) of each stock right:

TV = MV of stock right on – subscription price

Number of rights to purchase 1 share + 1
= P20 – P15 = P5
2+1 3

= P1.67

18. Computation of basic earnings per share:

Weighted average number of shares outstanding:

 Jan. 1 110,000 x 12 months outstanding 1,320,000
Sept. 30 2,000 bonds x 40 =
80,000 x 3 months outstanding 240,000
Total 1,560,000

Weighted average number of shares (1,560,000 /12) 130,000

BEPS (600,000 /130,000) P4.62

Computation of diluted earnings per share:

Net income P600,000
Add: Interest on bonds payable
(2,000,000 x 6% x 9/12) 90,000
Less: income tax (90,000 x 35%) 31,500 58,500
Adjusted net income 658,500
Divide by average number of shares outstanding:
Number of shares for BEPS (see no.1) 130,000
Incremental shares issued on assumed
conversion (80,000 x 9/12) 60,000 190,000
DEPS P 3.47

19. Computation of basic earnings per share – 2007:

Weighted average number of shares for 2007:
Jan.1 32,500 x 1.08* x 2** = 70,200 x 12 months = 842,400
May 1 4,500 x 1.08* x 2** = 9,720 x 8 months = 77,760
Total 920,160

*8% stock dividend issued on Aug.1,2007

**2-for-1 stock split issued on June 1,2008

Weighted average number of shares (920,160 / 12) 76,680

Net income for 2007 P 632,400

Less: Preferred dividend (135,000 x 12%) 16,200
Net income identified with common stock 616,200
Divide by weighted average number of common shares 76,680
BEPS for 2007 P 8.04

Computation of net income for 2008:

Increase in retained earnings (942,400 – 792,920) P149,480
Add: preferred dividends in 2008
(165,000 x 12%) P19,800
Common dividends (P4 x 81,620*) 326,480 346,280
Net income for 2008 P495,760

*82,120 shares issued – 500 treasury shares = 81,620 outstanding

 Computation of basic earnings per share -2008:

Weighted average number of shares 2008:

Jan.1 39,960 x 2* = 79,920 x 12 months = 959,040
31 1,100 x 2& = 2,200 x 11 months = 24,200
Sept.1 500 x 4 months = (2,000)
Nov.1 500 x 2 months = 1,000
Total 982,240

*2-for-1 stock split issued on June1,2008

Weighted average number of shares (982,240 / 12) 81,853

Net income for 2008 P495,760

Less: preferred dividends 19,800
Net income identified with common stock 475,960
Divide by weighted average number of common shares 81,853
BEPS P 5.81

20. Computation of BEPS:

Operating revenue P3,500,000
Operating expenses (1,800,000)
Finance cost (250,000)
Income before tax 1,450,000
Income tax 35% (517,500)
Net income P 942,500

BEP (942,500 / 35,000 common shares) P26.93

Computation of DEPS:
Net income P942,500

Number of common shares to be used in the computation:

Actual number of shares outstanding 35,000
Incremental shares:
Option shares 20,000
Less: assumed treasury shares
 (30 x 20,000 = P600,000 /40) 15,000 5000
Total 40,000

DEPS (942,500 / 40,000) P23.56