Intermediate Accounting Volume III 2012 edition Suggested Answers

CHAPTER 7
EARNINGS PER SHARE

PROBLEMS

7-1
Case A
600,000 x 12/12 x 110% 660,000
48,000 x 3/12 (12,000)
648,000

Case B
4,000,000 x 12/12 4,000,000
1,000,000 x 9/12 750,000
500,000 x 6/12 250,000
5,000,000

Case C
600,000 x 12/12 600,000
180,000 x 9/12 135,000
735,000

7-2.1 (Murdock Company)

Numerator = P517,500 – P300,000 = P217,500
Denominator
150,000 x 12/12 150,000
30,000 x 9/12 22,500
172,500
BEPS = 217,500 / 172,500 = P1.2609

7-3 Case A
BEPS = P500,000 / 50,000 = P10
DEPS = P513,000 / 55,000 = P9.33

Numerator for DEPS = P500,000 + (500,000 x 4% x 65%) = P513,000

Denominator for DEPS = 50,000 + 5,000 =55,000

Case B
BEPS = P40,000/ 50,000= P0.80
DEPS = P40,000/ 50,000= P0.80

Note: The convertible preference is antidilutive as P60,000 avoidable dividends divided by 10,000
shares is more than P0.80; hence, the convertible preference is ignored in the computation of
DEPS.
Case C
Weighted average # of shares
700,000 x 12/12 700,000
300,000 x 4/12 100,000
200,000 x 3/12 50,000
850,000
BEPS = P6,000,000 / 850,000 P7.0588
Intermediate Accounting Volume III 2012 edition Suggested Answers

DEPS = P6,910,000 / 1,200,000 P5.76

Avoidable interest
(10,000,000 x 8% x 65%) P520,000
10,000,000 x 8% x 9/12 x 65% 390,000
P910,000

Numerator = P6,000,000 + P910,000 P6,910,000

Denominator:
For BEPS 850,000
200,000 x 9/12 150,000
200,000 x 12/12 200,000
1,200,000

7-4 Case A (For both basic and diluted earnings per share)
44,000 x 12/12 x 1.25 x 2 110,000
56,000 x 11/12 x 1.25 x 2 128,333
25,000 x 8/12 x 1.25 x 2 ( 41,667)
10,000 x 4/12 x 2 6,667
Weighted average no. of shares 203,333

Case B (For both basic and diluted earnings per share)

Work back to find beginning outstanding shares
511,875/0.75 = 682,500/1.05 = 650,000 – 35,000 = 615,000/3 = 205,000
205,000 + 5,000 – 20,000 = 190,000 shares
190,000 x 3 x 1.05 x 12/12 598,500
20,000 x 3 x 1.05 x 11/12 57,750
5,000 x 3 x 9/12 x 1.05 (11,812.50)
35,000 x 1.05 x 6/12 18,375
Weighted average no. of shares 662,812.50

Case C
For basic EPS
2010
200,000 x 1.10 x 12/12 x 2 440,000
125,000 x 1.10 x 9/12 x2 206,250
7,000 x 3/12 x 2 __3,500
649,750
2012:
325,000 x 1.10 = 357,500+7,000=364,500 shares, beginning
364,500 x 2 x 12/12 729,000
80,000 x 3/12 20,000
749,000

For Diluted EPS

2010
For basic EPS 649,750
125,000 x 110% x 3/12 x 2 68,750
7,000 x 9./12 x 2
7000 (25-20)
25 x 9/12 x 2 x 1.1x2 2,310
720,810
Intermediate Accounting Volume III 2012 edition Suggested Answers

2012
Beginning 364,500 x 2 x 12/12 729,000
80,000 x 3/12 20,000
749,000

7-5 (Bay Corporation)

(a) Basic EPS
1,800,000 – (2,000 x 100 x 4%) = 1,792,000 = 8.96
200,000 200,000

(b) Diluted EPS

1,800,000 = 1,800,000 = 8.91
200,000+2,000 202,000

(c) Basic EPS

1,800,000 – (2,000x100x12%) = 1,776,000 = 8.88
200,000 200,000

Diluted EPS = 8.88

Preference share is considered to be antidilutive as shown below:
1,800,000 = 8.91 (considered antidilutive; only a single presentation
200,000 of EPS is reported in the financial statements)

7-6 (Cosmic, Inc.)

Basic EPS
350,025 = 350,025 = 29.17
10,000+ (4,000x6/12) 12,000

Diluted EPS
350,025+ (70,000 x .65) = 395,525 = 28.25
10,000+(4,000x6/12)+(4,000x6/12) 14,000

7-7 (Laser Company)

a. Basic EPS
156,700 _____ = 156,700 = 5.11
30,000+(2,000x4/12) 30,667

Diluted EPS
156,700 = 4.60
34,080*

*30,000 x 12/12 30,000

2,000 x 4/12 667
6,000 x (25-9) x 8/12 2,560
25
4,000 x (25-9) x 4/12 853
25
34,080
Intermediate Accounting Volume III 2012 edition Suggested Answers

b. Basic EPS
156,700 _____ = 156,700 = 4.897
30,000+(6,000x4/12) 32,000

DEPS

*for BEPS 32,000

6,000 x (25-9)
25 x 8/12 2,560
34,560

DEPS = 156,700/34,560 P4.53

7-8.1 (Lili Pharmaceutical Company)

↑ in earnings
attributable to Earnings per
ordinary incremental share
shareholders ↑ in number of ordinary shares
Options Nil 100,000 (20-15) = 25,000 Nil
20
Convertible P1,250,000 x 8.5% 25,000 x 10 P0.425
preference = P106,250 = 250,000
shares
7% convertible P5,000,000 x 7% x 5,000 x 50 = P0.91
bonds 65%= P227,500 250,000

The sequence to include potential ordinary shares is as follows

(1) options
(2) convertible preference shares
(3) convertible bonds
Basic earnings per share =( P 1,500,000 – P106,250) / 1,000,000 shares = P1.39

When only options are considered, the dilutive earnings per share is
P1,500,000-P106,250 = P 1.36
1,000,000 + 25,000
When convertible preference shares are then considered, the dilutive earnings per share is
______P1,500,000____ = P1.18 thus, the convertible preference is dilutive.
1,025,000 + 250,000
When 7% convertible bonds are also considered, the dilutive earnings per share is
P1,500,000 + 227,500 = P1.13 ; thus, the convertible bonds are dilutive
1,275,000 + 250,000
The dilutive earnings per share is P1.13
Intermediate Accounting Volume III 2012 edition Suggested Answers

MULTIPLE CHOICE QUESTIONS

Theory
MC1. C MC6. D
MC2. C MC7. C
MC3. B MC8. C
MC4. D MC9. A
MC5. B MC10. C

Problems
MC11. C 1,000,000 – (20,000 x 100 x 5%) = 900,000/200,000 = 4.50
MC12. C 300,000 – 30,000 = 270,000; 270,000/30,000+(6,000x6/12) = 8.18
MC13. B 290,100 – (30,000 x 4) = 170,100/60,000+(31,500x 8/12) = 2.10
MC14. B 1,100,000 = 1,100,000 = 4.82
(200,000 x 1.10) + 40,000 x (25-20) 228,000
25
MC15. D 250,000 + (60,000x3/12) + 50,000 = 315,000
MC16. B 1,000,000 – (5% x 10,000 x 100)/100,000 = 9.50
MC17. D 2,500,000 + (500,000 x 9/12) + (250,000 x 6/12) = 3,000,000
3,000,000 + (5,000 x 40 x 3/12) = 3,050,000
MC18. B 600,000 – (20,000 x 3) = 540,000/200,000 = 2.70
MC19. C 600,000 + (1,000,000 x 10% x 70%) = 2.35
200,000 + 40,000 + (1,000 x 45)
MC20. D 30,000 x (25-20)/25 = 6,000
MC21. B 495,000/4.95 = 100,000 shares; 2010: 495,000/(100,000 x 1.10) = 4.50
2012: 825,000/(110,000 + (12,000 x 4/12) = 7.24
MC22 B 850,000/130,000 = 6.54
MC23 B 150,000 + (15,000 x 6/12) + (15,000 x 2/12) = 160,000
MC24 B (770,000 – 140,000) / 160,000 = 3.94
MC25 A 770,000/(160,000+40,000) = 3.85
MC26 B 100,000 + (10,000 x 3/12) = 102,500
MC27 C (177,500 – 20,000) / 102,500 = 1.54
MC28 B 177,500 / (102,500 + 20,000) = P1.45
MC29 C (100,000 X 2 X 120%) + (30,000 X 120% X 7/12) = 261,000
MC30 A Correction: Dividend rate on preference share is 7.5%, instead of 5%.
Numerator: 2,000,000 – (1,000,000 x 7.5% x 8/12) = 1,950,000
Denominator: 100,000 + (60,000 x 4/12) = 120,000
BEPS = 1,950,000/120,000 = P16.25