Solutions to GAAP : Graded Questions Earnings per share

Section A: Basic and headline earnings per share

Solution 24.1

a) False. The basic earnings per ordinary share must be presented on the face of the
statement of comprehensive income. See IAS 33.66
See IAS 33.2 (a)
b) True.

c)
C800 000 – C100 000
=
250 000

= 280 cents

d)
(C1 100 000 – C200 000) x
8
= /9
250 000

= 320 cents

The ratio in which the earnings are to be shared ( 1/9 and 8/9) between the two equity share types is
calculated as follows:
Let X = the portion of the earnings belonging to the ordinary shareholders
Then 1/8 X = the portion of the earnings belonging to the participating preference shareholders
And therefore:
X + 1/8 X = total earnings to be shared
8
/8 X + 1/8 X = total earnings to be shared
9
/8 X = total earnings to be shared
X = total earnings to be shared x 8/9

Or:
X + 1/8 X = (1 100 000 – 200 000)
8
/8 X + 1/8 X = (1 100 000 – 200 000)
9
/8 X = 900 000
X = 900 000 x 8/9
X = C800 000 (share belonging to ordinary shareholders)

e) False. IAS 33 only requires that earnings per share be presented for ordinary shares See IAS
33.9

f)
C330 000
= 132 000 x 12/12 + 50 000 x 9/12 + 48 000 x
4/12

= 178 cents

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Solutions to GAAP : Graded Questions Earnings per share

Solution 24.1 continued . . .

g)
Number of shares Actual number
Opening balance: 1/1/20X2 350 000
Rights issue (350 000 / 5 x 2) 140 000
490 000
Share split (490 000 / 5 x 7 – 490 000) 196 000
Closing balance: 31/12/20X2 Balancing; or: (490 000 / 5 x 7) 686 000

h)
BEPS for the year ended 31 December 20X1 would be restated as follows:
C250 000
=
132 000 + 50 000

= 137 cents

BEPS for the year ended 31 December 20X2

C330 000
=
132 000 + 50 000

= 181 cents

 Service & Kolitz, 2018 Chapter 24: Page 2

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.1 continued . . .

i) BEPS for the year ended 31 December 20X2

C300
= 000
781 482 (W1 or W2)

= C0.3839 per share

W1: Calculation of the number of shares

 The number of shares issued in terms of the rights issue: Given as 100 000 shares
 The cash received from the rights issue: 100 000 shares x C2 = C200 000
 The number of shares that are issued may be split into those shares that are effectively sold
and those that are effectively given away:
Number
Shares sold (issue for value): proceeds/ market price cum rights = 71 429
C200 000/ C2.80
Shares given away (issue for no value): total shares issued – shares sold = 28 571
100 000 shares – 71 429 shares or (100 000 x C2.80 – 100 000 x C2)/ C2.80
100 000

Number of shares Current year Prior year

Actual
(weighted & adjusted) (weighted) (adjusted)
Balance: 1/1/20X2 700 000 700 000 700 000
Issue for value (71 429 x 9/12) 71 429 53 572 0
771 429 753 572 700 000
Issue for no value Note 2 28 571 27 910 25 926
(CY: 28 571/ 771 429 x 753 572);
(PY: 28 571/ 771 429 x 700 000)
Balance: 31/12/20X2 800 000 781 482 725 926

W2: Alternative calculation of the number of shares

Theoretical ex-rights value per share:
(Fair value of all issued shares before the rights issue) + (the resources received from the rights issue)
Number of shares in issue after the rights issue

700 000 shares x C2.80 + 100 000 shares x C2 C2 160 000

= = = C2,70 per share
700 000 + 100 000 800 000
Adjustment factor:
Fair value per share prior to the exercise of the right C2,80
= = 1,037037
Theoretical ex-right value per share C2,70
Number of shares (rounded up):
= Current year (700 000 shares x 1,037037 x 3/12 + 800 000 x 9/12) 781 482
= Prior year (700 000 shares x 1,037037) 725 926
Comment:
Notice that the current year calculation of the number of shares is weighted for the number of
months before the issue and after the issue, whereas the prior year is not weighted at all.

 Service & Kolitz, 2018 Chapter 24: Page 3

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.2

Subject header: Earnings per share queries

Dear FD

You have identified three very important questions, each of which I will address below:

Question 1: When should comparative earnings per share be restated:

The following situations will result in comparatives for earnings per share to be restated:
 A capitalisation issue or a share split (i.e. a not for value issue)
 A change in accounting policy or a correction of an error

With a capitalisation issue or a share split no new cash resources are available to the
company. The number of shares increases resulting in a decrease in the EPS. Therefore, the
comparative EPS must be restated to ensure that comparability is not lost. This adjustment
applies not only to the prior period but to the figures of all previous periods that are presented
as comparatives as well.

A change in accounting policy or a correction of an error gives rise to a prior year

adjustment in terms of IAS 8. With a prior year adjustment it is necessary to restate the
previous year’s comparatives and the retained earnings at the beginning of the year. If the
adjustment has an impact on the ‘earnings’ used for the earnings per share calculation, it will
therefore be necessary to restate the earnings per share figure for the previous year.

Question 2: Why the profit on sale of investments is included in earnings per share:

IAS 33 requires earnings per share to be based on basic earnings, which is defined as the
profit or loss for the period attributable to ordinary shareholders after deducting preference
dividends. In terms of IAS 8, profit for the period should include all items of income and
expense recognised in a period. The profit on sale of investments should be included in profit
for the period and therefore should be included in basic earnings as well.

Question 3: Why earnings per share a better indicator of performance than profit for the year
and dividends per share

The dividend per share depends on the dividend payout policy of a company, and not
necessarily on the size of its profits. It is not possible to judge a company’s performance on its
dividends declared. In new or expanding companies, for example, it would be irresponsible to
adopt too high a dividend payout ratio. A low dividend per share in such cases would not
necessarily reflect poor performance - management may just be retaining the profits in order
to re-invest in the business. Earnings per share, on the other hand, is based on profit earned by
the business regardless of whether such funds are being paid out to the owners or are being re-
invested to increase the value of the business.

 Service & Kolitz, 2018 Chapter 24: Page 4

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.2 continued . . .

Profit after tax on its own does not tell shareholders the extent of the return on their
investment. For example if two companies both reflect profit after taxation for the year of
C100 000 but company A has 1 000 shares and company B has 2 000 shares, it cannot be said
that a shareholder with one share in each of the companies has earned the same amount on
each investment, even though the profits earned by each company are the same. The one share
held in company A has yielded a C100 return whereas the one share in company B has only
yielded a C50 return once the profits have been shared out amongst the owners. It is therefore
more meaningful to look at earnings per share than at total earnings.

I hope this has helped you, please feel free to email or call if you have any further questions.

Regards

 Service & Kolitz, 2018 Chapter 24: Page 5

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.3

GLITCH LIMITED
EXTRACTS FROM THE STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
Notes 20X1 20X0
C C
Profit for the year 50 000 40 000
Other comprehensive income for the year - -
Total comprehensive income for the year 50 000 40 000

Basic earnings per ordinary share 20X1: 47 500 / 1 375 000

20X0: 37 500 / 1 000 000 5 C0,03455 C0,03750

GLITCH LIMITED
EXTRACTS FROM STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20X1
Ordinary Preference Retained
shares shares earnings
C C C
Opening balance at 1/1/20X0 Given 200 000 50 000 60 000
Total comprehensive income Given 40 000
Ordinary dividends declared Given (3 000)
Preference dividends declared Given (2 500)
Opening balance at 1/1/20X1 200 000 50 000 94 500
Share issue 500K x 0.20 100 000 100 000
Total comprehensive income Given 50 000
Ordinary dividends declared Given (5 000)
Preference dividends declared Given (2 500)
Closing balance at 31/12/20X1 300 000 50 000 137 500

GLITCH LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X1
5. Earnings per share
The calculation of earnings per share is based on earnings of C47 500 (20X0: C37 5000) and a
weighted average of 1 375 000 ordinary shares (20X0: 1 000 000) in issue throughout the year.
Reconciliation of earnings 20X1 20X0
C C
Profit for the year 50 000 40 000
Preference dividends (2 500) (2 500)
Basic earnings 47 500 37 500

6. Dividends per share Comment 1

The calculation of dividends per share is based on a dividend declared of C5 000 (20X0: C3 000) and
an actual number of ordinary shares of 1 500 000 (20X0: 1 000 000). Comment 2
20X1 20X0
Dividends per ordinary share 20X1: C5 000/ 1 500 000 C0,0033 C0,003
20X0: C3 000/ 1 000 000

 Service & Kolitz, 2018 Chapter 24: Page 6

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.3 continued . . .

Comments:
1. Dividends per share may be presented on the face of the statement of changes in equity or in the
notes. This question asked for dividends per share to be shown in the notes.
2. The ‘dividends per share’ has to be disclosed per IAS 1.107, but adequate guidance is not given as
to the measurement thereof. Therefore, instead of using the actual number of shares, it may be
acceptable to use the weighted-average number of shares instead.

Workings

W1. Weighted average number of shares (issue for value)

Actual 20X1 20X0
Balance (beg) (C200 000/ C0,20) 1 000 000 1 000 000 1 000 000
Cash issue 31/3/X1 (500 000 x 9/ 12) 500 000 375 000 -
Balance (end) 1 500 000 1 375 000 1 000 000

 Service & Kolitz, 2018 Chapter 24: Page 7

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.4

LOUISIANNA LIMITED
(EXTRACTS FROM) STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
Notes 20X1 20X0
C C
Profit for the year 100 000 190 000
Other comprehensive income 0 0
Total comprehensive income 100 000 190 000

Basic earnings per Class A ordinary share 5 C0,600 C1,140

Basic earnings per Class B ordinary share 5 C0,200 C0,380

LOUISIANNA LIMITED
(EXTRACTS FROM) STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20X1
Ordinary shares: Ordinary shares: Retained
Class A Class B earnings
C C C
Opening balance at 1/1/20X0 Given 50 000 100 000 xxx
Total comprehensive income Given 190 000
Class A ordinary dividends Given (10 000)
Class B ordinary dividend (10 000 x 1/9) (1 111)
Opening balance at 1/1/20X1 50 000 100 000 xxx
Total comprehensive income Given 100 000
Class A ordinary dividends Given (20 000)
Class B ordinary dividend (20 000 x 1/9) (2 222)
Closing balance at 31/12/20X1 50 000 100 000 xxx

LOUISIANNA LIMITED
(EXTRACTS FROM) NOTES TO THE FINANCIAL STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 20X1

5. Earnings per share

Basic earnings per Class A Ordinary Share:

The calculation of earnings per Class A ordinary share is based on earnings of C90 000 (20X0:
C171 000) and 150 000 W1 Class A ordinary shares (20X0: 150 000 W1) in issue, after adjusting for the
share split on 1 July 20X1.

Basic earnings per Class B Ordinary Share:

The calculation of earnings per Class B ordinary share is based on earnings of C10 000 (20X0:
C19 000) and 50 000 (20X0: 50 000) Class B ordinary shares in issue during the year.

Reconciliation of earnings: 20X1 20X0

C C
Profit for the year 100 000 190 000
Less preference dividends (0) (0)
Basic earnings 100 000 190 000
- Class A ordinary share (X1: 100 000 x 9/10) (X0: 190 000 x 9/10) W2 90 000 171 000
- Class B ordinary share (X1: 90 000 x 1/9) (X0: 171 000 x 1/9) 10 000 19 000

 Service & Kolitz, 2018 Chapter 24: Page 8

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.4 continued ….

LOUISIANNA LIMITED
NOTES TO THE FINANCIAL STATEMENTS continued …
FOR THE YEAR ENDED 31 DECEMBER 20X1

6. Dividends per share Comment 1

Dividends per Class A ordinary shares

20X1 20X0
Dividends per Class A ordinary share 20X1: C20 000/ 150 000 C0,133 C0,200
20X0: C10 000/ 50 000

The calculation of dividends per Class A ordinary share is based on a dividend declared of C20 000
(20X0: C10 000) and an actual number of ordinary shares of 150 000 (20X0: 50 000). Comment 2

Dividends per Class B ordinary shares

20X1 20X0
Dividends per Class B ordinary share 20X1: C2 222/ 50 000 C0,044 C0,022
20X0: C1 111/ 50 000

The calculation of dividends per Class B ordinary share is based on a dividend declared of C2 222
(20X0: C1 111) and an actual number of ordinary shares of 50 000 (20X0: 50 000). Comment 2

Comments:
1. Dividends per share may be presented on the face of the statement of changes in equity or in the
notes. This question asked for dividends per share to be shown in the notes.
2. The ‘dividends per share’ has to be disclosed per IAS 1.107, but no guidance is given as to the
measurement thereof. It is assumed that the dividends recognised as distributions to owners during
the reporting period are divided by the actual number of ordinary shares outstanding at the date of
declaration (thus not on a weighted number of issued shares.

Workings

W1: Adjusted Class A Ordinary shares

Actual Weighted Adjusted
20X1 20X1 20X0
Balance (beg) Given 50 000 50 000 50 000
Share split 150 000 – 50 000 100 000 100 000 100 000
Balance (end) 50 000 ÷ 1 x 3 150 000 150 000 150 000

W2: Fractional share of earnings belonging to Class A ordinary shares

Class A ordinary shares are allocated 9/10 of the basic earnings. This was calculated as follows:
Let X = the share of the basic earnings belonging to the Class A ordinary shareholders
Then substitute X into the following equation:
Basic earnings = portion belonging to Class A ordinary shareholders + portion belonging to
Class B ordinary shareholders
Basic earnings = X + 1/9 X
Basic earnings = 9/9 X + 1/9 X
Basic earnings = 10/9 X
X = Basic earnings x 9/10

 Service & Kolitz, 2018 Chapter 24: Page 9

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.5

LAUREN LIMITED
(EXTRACT FROM)STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
Notes 20X1 20X0
C C

Profit for the year 500 000 800 000

Other comprehensive income for the year - -
Total comprehensive income for the year 500 000 800 000

Basic earnings per share 20X1: 494 000 / 200 000

20X0: 794 000 / 200 000 5 C2,470 C3,970

LAUREN LIMITED
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20X1
Ordinary Preference Retained Total
shares shares earnings
Calculations C C C C
Opening balance: 1/1/20X0 1; 2 ; 3 200 000 40 000 240 000 480 000
Total comprehensive income Per SOCI 800 000 800 000
Ordinary dividends declared Given (22 000) (22 000)
Preference dividends paid Given (6 000) (6 000)
Opening balance: 1/1/20X1 200 000 40 000 1 012 000 1 252 000
Total comprehensive income Per SOCI 500 000 500 000
Ordinary dividends declared Given (20 000) (20 000)
Preference dividends paid Given (6 000) (6 000)
Closing balance: 31/12/20X1 200 000 40 000 1 486 000 1 726 000

Calculations:
1. 100 000 shares x C2 = C200 000
2. 20 000 shares x C2 = C40 000
3. Given

 Service & Kolitz, 2018 Chapter 24: Page 10

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.5 continued …

LAUREN LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X1

5. Earnings per share

Basic earnings per share

The calculation of earnings per share is based on earnings of C494 000 (20X0: C794 000) and 200 000
ordinary shares (20X0: 200 000) after adjusting for the share split during 20X1.

Reconciliation of earnings 20X1 20X0

C C
Profit for the year 500 000 800 000
Preference dividends (6 000) (6 000)
Basic earnings 494 000 794 000

6. Dividends per share Comment 1

20X1 20X0
Dividends per ordinary share 20X1: C20 000/ 200 000 C0,10 C0,22
20X0: C22 000/ 100 000

The calculation of dividends per share is based on a dividend declared of C20 000 (20X0: C22 000)
and an actual number of ordinary shares of 200 000 (20X0: 100 000). Comment 2

Comments:
1. Dividends per share may be presented on the face of the statement of changes in equity or in the
notes. This question asked for dividends per share to be shown in the notes.
2. Dividends per share have to be disclosed per IAS 1.107, but adequate guidance is not given as to
the measurement thereof. Therefore, instead of using the actual number of shares, it may be
acceptable to use the weighted-average number of shares.

Workings

W1. Number of shares (issue for no value) NOTE

Actual 20X1 20X0
Balance (beg) 100 000 100 000 100 000
Share split 1/07/X1 100 000 100 000 (c) 100 000 (d)
Balance (end) 200 000 (a) 200 000 200 000

Calculations:
(a) Share split: 100 000 ÷ 1 x 2 = 200 000
(b) Balance after share split: 200 000 – Balance before share split: 100 000 = Increase: 100 000
(c) Adjustment in 20X1: 1 000 000 x 2 000 000 (20X1 balance) / 2 000 000 (actual)
(d) Adjustment in 20X0: 1 000 000 x 2 000 000 (20X0 balance) / 2 000 000 (actual)

Note:
A share split is an issue for no value.

 Service & Kolitz, 2018 Chapter 24: Page 11

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.6

Part A

ROGER LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8
Notes 20X8 20X7
C C
Profit before tax 750 000 730 000
Income tax expense (400 000) (300 000)
Profit for the year 350 000 430 000
Other comprehensive income 0 0
Total comprehensive income 350 000 430 000

Basic earnings per share 20X8: 318 000 / 829 897

20X7: 398 000 / 773 196 5 0,3832 0,5147

ROGER LIMITED
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20X8
Ordinary Preference Retained Total
shares shares earnings
C C C C
Opening balance at 1/1/20X7 375 000 400 000 200 000 975 000
Total comprehensive income 430 000 430 000
Ordinary dividends declared (30 000) (30 000)
Preference dividends declared (32 000) (32 000)
Opening balance at 1/1/20X8 (W3) 375 000 400 000 568 000 1 343 000
Rights issue 550 000 550 000
(375K/ 3 x 1) or (500K – 375K)
[250K x (2.20-0.50)] =425K
Total comprehensive income 350 000 350 000
Ordinary dividends declared (40 000) (40 000)
Preference dividends declared (32 000) (32 000)
Closing balance at 31/12/20X8 925 000 400 000 846 000 2 171 000

20X7 Dividends per ordinary share 1. 30 000 / 750 000 0,04

20X8 Dividends per ordinary share2. 40 000 / 1 000 000 0,04

Comments:
1. Dividends per share may be presented on the face of the statement of changes in equity or in the
notes.
2. Dividends per share have to be disclosed per IAS 1.107, but adequate guidance is not given as to
the measurement thereof. Therefore, instead of using the actual number of shares, it may be
acceptable to use the weighted-average number of shares.

 Service & Kolitz, 2018 Chapter 24: Page 12

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.6 continued . . .

Part A continued…

ROGER LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8

5. Earnings per share

Basic earnings per share

The calculation of earnings per share is based on earnings of C318 000 (20X7: C398 000) and a
weighted average of 829 897 ordinary shares (20X7: 773 196) after adjusting for the rights issue on
30th September 20X8.

Reconciliation of profit to earnings 20X8 20X7

C C C C
Gross Net Gross Net
Profit/(loss) for the period 350 000 430 000
Preference dividends (32 000) (32 000)
Basic earnings 318 000 398 000

Workings

W1: Weighted average/ Adjusted number of shares

20X8 20X7
Ordinary shares weighted adjusted
Balance (1/1/20X8): W3 750 000 750 000
Rights issue: 20X7: 750 000 x 1,030927 773 196
20X8: 750000 x 9/12 x 1,030927 579 897
20X8:1 000 000 x 3/12 250 000
829 897 0

Calculating the ex right factor share value:

FV of shares in issue + Amount received after rights issue
Total amount after rights issue

(750 000 x 2.50) + (250 000 x 2.20)

1 000 000

1 875 000 + 550 000 = 2 425 000

1 000 000 1 000 000

= 2,4250

Adjustment factor:
Fair value = 2.50
Ex right value 2.4250
= 1,0309278

 Service & Kolitz, 2018 Chapter 24: Page 13

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.6 continued . . .

Part A continued …

W2. Number of Shares (rights issue) - an alternative calculation

Weighted
Actual average Adjusted
20X8 20X8 20X7
Balance: 1/1/20X8 (see working 3) 750 000 750 000 750 000
Issue for value (i.e. effectively sold at market value)
(750K/ 3 x 1 x C2,2/ C2,5); (x 3/12) 220 000 55 000 0
970 000 805 000 750 000
Issue for no value (i.e. effectively given away for free)
(see working 4) or
(250K – 220K); (30/ 970 x 805K); (30/ 970 x 750K) 30 000 24 897 23 196
Balance: 31/12/20X8 (C500 000 / 0.5) 1 000 000 829 897 773 196

W3 Number of shares at beginning of the year

the number of shares at year-end = C500 000 / C0,50 = 1 000 000 shares
let X = the number of shares in issue at the beginning of the year
then :
X + X/ 3 x 1 = 1 000 000 shares or 1X + 3X = 1 000 000
1,3333X = 1 000 000
X = 1 000 000/1.3333 = 750 000 shares (at C0.50 per share = C375 000)

check:
750 000 / 3 x 1 = 250 000 (issued through rights issue)
opening balance + rights issue = balance at year-end
750 000 + 250 000 = 1 000 000 (at C0.50 per share = C500 000)

W4 Percentage increase in number of shares due to ‘free’ shares

using 'actual' figures: 30/970 x 100 = 3.09278%
apply to 20X8: 805 000 x 3,09278% = 24 897
apply to 20X7: 750 000 x 3,09278% = 23 196

 Service & Kolitz, 2018 Chapter 24: Page 14

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.6 continued . . .

Part B

ROGER LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8
Notes 20X8 20X7
C C
Profit before tax 750 000 730 000
Income tax expense (400 000) (300 000)
Profit for the year 350 000 430 000
Other comprehensive income 0 0
Total comprehensive income 350 000 430 000

Basic earnings per ordinary share 20X8: 318 000 / 829 897
20X7: 398 000 / 773 196 5 0.3832 0.5147

ROGER LIMITED
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20X8
Ordinary Preference Retained Total
shares shares earnings
C C C C
Opening balance at 1/1/20X7 375 000 400 000 200 000 975 000
Total comprehensive income 430 000 430 000
Ordinary dividends declared (30 000) (30 000)
Preference dividends declared (32 000) (32 000)
Opening balance at 1/1/20X8 (W3) 375 000 400 000 568 000 1 343 000
Rights issue 550 000 550 000
(375K/ 3 x 1) or (500K – 375K)
[250K x (2.20-0.50)] =425K
Total comprehensive income 350 000 350 000
Ordinary dividends declared (40 000) (40 000)
Preference dividends declared (32 000) (32 000)
Closing balance at 31/12/20X8 925 000 400 000 846 000 2 171 000

20X7 Dividends per ordinary share Comment 1 & 2 30 000 / 750 000 0.04
20X8 Dividends per ordinary share Comment 1 & 2 40 000 / 1 000 000 0.04

Comments:
1. Dividends per share may be presented on the face of the statement of changes in equity or in the
notes to the financial statements.
2. Dividends per share have to be disclosed per IAS 1.107, but adequate guidance is not given as to
the measurement thereof. Therefore, instead of using the actual number of shares (as was done
above), it would be acceptable to use the weighted-average number of shares that were used to
calculate the earnings per share.

 Service & Kolitz, 2018 Chapter 24: Page 15

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.6 continued . . .

Part B continued …

ROGER LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8

5. Earnings per share

Basic earnings per share
The basic earnings per share is presented on the statement of comprehensive income.
The calculation of this basic earnings per share is based on earnings of C318 000 (20X7: C398 000)
and a weighted average of 829 897 ordinary shares (20X7: 773 196) after adjusting for the rights issue
on 30 September 20X8.
Headline earnings per share Note 1
20X8 2
0
X
7
C C
0
,
4
7
Headline earnings per share 20X8: 368 000 / 829 897 5
20X7: 368 000 / 773 196 0,4434 9
This headline earnings per share is calculated based on earnings of C368 000 (20X7: C368 000) and a
weighted number of 829 897 ordinary shares ( 20X7: 773 196 ) after adjusting for the rights issue on
30 September 20X8.

Reconciliation of profit to earnings 20X8 20X7

C C C C
Gross Net Gross Net
Profit/(loss) for the period Given 350 000 430 000
Preference dividends Given (32 000) (32 000)
Basic earnings 318 000 398 000
Loss/(profit) on sale of land Given 50 000 50 000 (37 500) (30 000)
Headline earnings 368 000 368 000

 Service & Kolitz, 2018 Chapter 24: Page 16

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.6 continued . . .

Part B continued …
Workings
W1: Weighted average/ Adjusted number of shares 20X8 20X7
Weighted Adjusted
Ordinary shares
Opening balance at 1 January: W3 750 000 750 000
Rights issue: 20X7: O/bal 750 000 x 1.030927 (i.e. not weighted) 773 196
20X8: O/bal 750000 x 1.030927 x 9/12 (i.e. weighted) 579 897
20X8: Bal after rights issue: 1 000 000 x 3/12 (weighted) 250 000
829 897

Calculating the ex right factor share value:

FV of shares in issue + Amount received after rights issue

Total amount after rights issue

(750 000 x 2.50) + (250 000 x 2.20)

1 000 000

1 875 000 + 550 000 = 2 425 000

1 000 000 1 000 000

= 2.4250
Adjustment factor:
Fair value = 2.50
Ex right value 2.4250
= 1.0309278

W2. Number of shares - an alternative calculation 20X8 20X7

Actual Weighted Adjusted
Balance: 1/1/20X8 (see working 3) 750 000 750 000 750 000
Issue for value (i.e. effectively sold at market value)
(750K/ 3 x 1 x C2,2/ C2,5); (x 3/12) 220 000 55 000 0
970 000 805 000 750 000
Issue for no value (i.e. effectively given away for free)
(250K – 220K);
(30/ 970 x 805K); (30/ 970 x 750K) (or see W 4) 30 000 24 897 23 196
Balance: 31/12/20X8 (C500 000 / 0.5) 1 000 000 829 897 773 196

W3 Number of shares at beginning of the year

The number of shares at year-end = C500 000 / C0,50 = 1 000 000 shares
Let X = the number of shares in issue at the beginning of the year
Then :
X + X/ 3 x 1 = 1 000 000 shares or 1X + 3X = 1 000 000
1,3333X = 1 000 000
X = 1 000 000/1.3333 = 750 000 shares (at C0.50 per share = C375 000)
check:
750 000 / 3 x 1 = 250 000 (issued through rights issue)
Opening balance + Rights issue = Closing balance at year-end
750 000 + 250 000 = 1 000 000 (at C0.50 per share = C500 000)

W4 Percentage increase in number of shares due to ‘free’ shares

% increase due to shares effectively issued for free (see actual column in W2): 30/970 x 100 = 3.09278%
Apply the % to 20X8: 805 000 x 3,09278% = 24 897
Apply the % to 20X7: 750 000 x 3,09278% = 23 196

 Service & Kolitz, 2018 Chapter 24: Page 17

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.7

a) Disclosure and presentation requirements – discussion

 IAS 33 only requires earnings per share to be presented for ordinary shares. See IAS 33.9

Ordinary shares are equity instruments that are subordinate to all other classes of equity
instruments. This means that ordinary shares participate in profits only after all other
types of shares (e.g. preference shares) have participated in the profit. In other words,
ordinary shareholders would only be entitled to profits after first deducting the profit
belonging to the other types of shares (e.g. the portion of the profit that is owed to the
preference shareholder as a preference dividend).
Thus, although both classes of preference shares are classified as equity, we do not
calculate ‘earnings per share’ for either of the preference shares because they have
preference over the ordinary shares.
 IAS 1 requires that dividends per share be disclosed for each and every dividend
appearing in the statement of changes in equity (SOCIE) as a distribution of equity.
Since the ordinary shares and both classes of preference shares are classified as equity, all
the related dividends are presented as distributions of equity.
Thus, the ‘dividend per share’ must be presented for each of these three classes of shares.
 Dividends per share may be disclosed in the statement of changes in equity (SOCIE) or in
the notes to the financial statements. See IAS 1.107

 Earnings per share (basic and diluted) are presented on the face of the statement of
comprehensive income (SOCI). See IAS 33.66

Details regarding how the earnings and weighted average number of shares were
calculated are disclosed in the notes to the financial statements. See IAS 33.70

P.S.
Headline earnings per share, together with the details regarding how the earnings and
weighted average number of shares were calculated, must be disclosed in the notes to the
financial statements – they may not be presented on the face of the statement of
comprehensive income. See IAS 33.73

 Service & Kolitz, 2018 Chapter 24: Page 18

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.7 continued . . .

b) Disclosure

MATTHEW LIMITED
NOTES TO THE FINANCIAL STATEMENT (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X1

5. Earnings per share

Basic earnings per ordinary share

The calculation of earnings per ordinary share is based on earnings of C222 500 (20X0: C201 071) and
a weighted average 1 145 833 ordinary shares (20X0: 1 111 111) in issue throughout the year.

Reconciliation of profits to earnings 20X1 20X0

C C
Profit for the year 320 000 290 000
Less preference dividends (the fixed portions only) (8 500) (8 500)
Both years: 4 000 + 4 500
Basic earnings W1 311 500 281 500
- ordinary share W1 222 500 201 071
- participating preference share W1 89 000 80 429

6. Dividends per share 20X1 20X0

C C
Dividends per ordinary share 20X1: 10 000 / 1 250 000 0,08 0,00
20X0: No dividend

Dividends per non-cumulative, non- 20X1: 4 500 / 90 000 0,05 0,05

redeemable preference share 20X0: 4 500 / 90 000

Dividends per non-cumulative, non- 20X1: 8 000 (W2) / 40 000 0,20 0,10
redeemable participating preference share 20X0: 4 000 (W2) / 40 000

 Service & Kolitz, 2018 Chapter 24: Page 19

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.7 continued . . .

b) continued ...

Workings

W1: Earnings split 20X1 20X0

Total 311 500 281 500

5
Ordinary shares /7 x 311 500; 5/7 x 281 500 222 500 201 071
2
Participating preference /7 x 311 500; 2/7 x 281 500; 89 000 80 429
shares (or: 2/5 x 5 /7)

Let X = share of earnings belonging to ordinary shareholders

Then:
X + 2/5X = Earnings to be shared
7
/5X = Earnings to be shared
X = Earnings to be shared x 5/7

This means that the ordinary shares will get 5/7 of the earnings, leaving 2/7 for the participating
preference shares.

W2: Total dividend belonging to participating preference shares 20X1 20X0

Fixed dividend Preference shares: C20 000 x Coupon rate: 20% 4 000 4 000
Participating dividend Ordinary div: C10 000 x Participation rate: 2/5 4 000 0
8 000 4 000

W3: Weighted average number of ordinary shares

W3.1 Weighted average number of ordinary shares using the ‘formula approach’

Step 1: Calculating the theoretical ex right value per share:

FV of shares in issue + Amount received from the rights issue

Number of shares in issue after the rights issue

(1000 000 x 1.40) + (250 000 x 0.70)

(1 000 000 + 250 000)

1 400 000 + 175 000 = 1 575 000

1 250 000 1 250 000

= 1.26 per share

Step 2: Calculating the adjustment factor:

Fair value per share prior to the exercising of the right = 1.40
Theoretical ex right value per share 1.26

= 1.11

 Service & Kolitz, 2018 Chapter 24: Page 20

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.7 continued . . .

b) continued ...

Workings continued ...

W3.1 continued …

Step 3: Calculating the number of shares to be used in the EPS calculations:

Current year =
= (Number of shares before the issue x Adjustment factor x Time period weighting before the
issue)+ (Number of shares after the issue x Time period weighting after the issue)
= 1 000 000 x 1.1111 x 9/12 +1 250 000 x 3/12 = 833 333 + 312 500
= 833 333 + 312 500
= 1 145 833

Prior year =
= Number of shares in the prior year x Adjustment factor
= 1 000 000 x 1.1111
= 1 111 111

W3.2 Weighted average number of ordinary shares using the ‘table approach’
Actual Weighted Adjusted
20X1 20X1 20X0
Balance: 1/1 1 000 000 1 000 000 1 000 000
For value Actual: (a) (b) and (c) 125 000 31 250 0
Weighted 20X1: 125 000 x 3/12
1 125 000 1 031 250 1 000 000
For no value Actual: (d) 125 000 114 583 111 111
Weighted 20X1: 125 000 / 1 125 000 x 1 031 250
Weighted 20X0: 125 000 / 1 125 000 x 1 000 000
Balance: 31/12 1 250 000 1 145 833 1 111 111

a) Number of shares issued: (C700 000 ÷ C0.70) ÷ 4 shares x 1 share = 250 000
b) Cash received: (C700 000 ÷ C0.70) ÷ 4 shares x 1 share x C0,70 = C175 000
c) Number of shares effectively sold: C175 000 ÷ C1,40 = 125 000
d) Number of shares effectively given away: issued 250 000 – sold 125 000 = 125 000

 Service & Kolitz, 2018 Chapter 24: Page 21

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.8

Part A

MARGE LIMITED
(EXTRACTS FROM) STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
Notes 20X1 20X0
C C
Profit for the period 400 000 450 000
Other comprehensive income 0 0
Total comprehensive income 400 000 450 000

Basic earnings per ordinary share 5 0,080 0,091

MARGE LIMITED
(EXTRACTS FROM) STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20X1
Participating
Ordinary preference Retained
shares shares earnings
Calculations C C C
Opening balance: 1/1/20X0 Calcs: 1; 2 1 000 000 500 000 xxx
Total comprehensive income Per SOCI 450 000
Participating preference dividend W3 (60 000)
Ordinary dividends Given (100 000)
Opening balance: 1/1/20X1 1 000 000 500 000 xxx
Total comprehensive income Per SOCI 400 000
Participating preference dividend W3 (62 000)
Ordinary dividends Given (120 000)
Closing balance: 31/12/20X1 1 000 000 500 000 xxx
20X1 20X0
Dividends per ordinary share Calc 3 C0,030 C0,025
Dividends per participating preference share Calc 4 C0,124 C0,120

Calculations:
1. 4 000 000 shares x C0.25 = C1 000 000
2. 500 000 shares x C1.00 = C500 000
3. Dividend per ordinary share: ordinary dividends ÷ number of ordinary shares:
20X0: C100 000 ÷ 4 000 000 = C0.025
20X1: C120 000 ÷ 4 000 000 = C0.030
4. Dividend per participating preference share: preference dividends ÷ number of preference shares:
20X0: C60 000 ÷ 500 000 = C0.120
20X1: C62 000 ÷ 500 000 = C0.124
Comment:
Notice that the ‘dividend per share’ is presented for both the ordinary shares and the preference shares.
This is because IAS 1 requires dividends per share to be presented for each and every distribution of
equity: since these preference shares are classified as equity, the related preference dividend is
presented as a distribution of equity and thus we must present the related dividend per share.

 Service & Kolitz, 2018 Chapter 24: Page 22

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.8 continued …

Part A Continued…

MARGE LIMITED
NOTES TO THE FINANCIAL STATEMENT (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X1

5. Earnings per share

Basic earnings per share

The calculation of earnings per ordinary share is based on earnings of C318 182 (20X0:
C363 636) and
4 000 000 ordinary shares (20X0: 4 000 000) in issue during the year.

Reconciliation of earnings 20X1 20X0

C C
Profit for the year Given 400 000 450 000
Preference dividends Fixed div: 500 000 x C1 x Coupon (50 000) (50 000)
rate: 10%
Basic earnings 350 000 400 000
- ordinary share W1 318 182 363 636
- participating preference share W1 31 818 36 364

Comment:
Notice that the earnings per share is only presented for the ordinary share – it is not presented for the
preference share since IAS 33 requires earnings per share to be presented for ordinary shares.

 Service & Kolitz, 2018 Chapter 24: Page 23

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.8 continued …

Part A Continued…

Workings

W1: Earnings split 20X1 20X0

C C
Total earnings 350 000 400 000
10
- ordinary share: /11 x 350 000; 10/11 x 400 000 318 182 363 636
1
- participating preference share /11 x 350 000; 1/11 x 400 000 31 818 36 364

Or:
20X1: X + 1/10 X = 350 000; therefore X = 318 182 (See detailed calculation below)
And 20X0: X + 1/10 X = 400 000; therefore X = 363 636 (See detailed calculation below)
Check:
Share belonging to participating preference shares =
20X1: 1/10 x ordinary share = 1/10 x 318 181 = 31 818
20X0: 1/10 x ordinary share = 1/10 x 363 636 = 36 364

Detailed calculation:
Participating preference shares are allocated 1/11 of the basic earnings.
This was calculated as follows:
Let X = the share of the basic earnings belonging to ordinary shareholders
Then substitute X into the following equation:
Basic earnings = portion belonging to ordinary shareholders + portion belonging to
participating preference shares
Basic earnings = X + 1/10 X
Basic earnings = 10/10 X + 1/10 X
Basic earnings = 11/10 X
X = Basic earnings x 10/11

W2: Basic earnings per ordinary share 20X1 20X0

Attributable earnings (W1) C318 182 C363 636

No. of ordinary shares 4 000 000 4 000 000

Earnings per ordinary share C0,0795 C0,091

W3: Participating preference share dividends 20X1 20X0

C C
Fixed dividend [500 000 x C1 x 10%] 50 000 50 000
Participating dividend [1/10 of ordinary dividend] 12 000 10 000
62 000 60 000

 Service & Kolitz, 2018 Chapter 24: Page 24

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.8 continued …

Part B

MARGE LIMITED
(EXTRACTS FROM) STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X1
Notes 20X1 20X0
C C
Profit for the period 400 000 450 000
Other comprehensive income 0 0
Total comprehensive income 400 000 450 000

Basic earnings per ordinary share 5 0,080 0,091

MARGE LIMITED
(EXTRACTS FROM) STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 20X1
Participating
Ordinary preference Retained
shares shares earnings
Calculations C C C
Opening balance: 1/1/20X0 Calcs: 1; 2 1 000 000 500 000 xxx
Total comprehensive income Per SOCI 450 000
Participating preference dividend W2 (60 000)
Ordinary dividends Given (100 000)
Opening balance: 1/1/20X1 1 000 000 500 000 xxx
Total comprehensive income Per SOCI 400 000
Participating preference dividend W2 (62 000)
Ordinary dividends Given (120 000)
Closing balance: 31/12/20X1 1 000 000 500 000 xxx

20X1 20X0
Dividends per ordinary share Calc 3 C0,030 C0,025
Dividends per participating preference share Calc 4 C0,124 C0,120

Calculations:
1. 4 000 000 shares x C0.25 = C1 000 000
2. 500 000 shares x C1.00 = C500 000
3. Dividend per ordinary share: ordinary dividends ÷ number of ordinary shares:
20X0: C100 000 ÷ 4 000 000 = C0.025
20X1: C120 000 ÷ 4 000 000 = C0.030
4. Dividend per participating preference share: preference dividends ÷ number of preference shares:
20X0: C60 000 ÷ 500 000 = C0.120
20X1: C62 000 ÷ 500 000 = C0.124

Comment:
Notice that although basic earnings per share is only presented for the ordinary share, the ‘dividend per
share’ is presented for both the ordinary shares and the preference shares. This is because IAS 1
requires dividends per share to be presented for each and every distribution of equity: since these
preference shares are classified as equity, the related preference dividend is presented as a distribution
of equity and thus we must present the related dividend per share.

 Service & Kolitz, 2018 Chapter 24: Page 25

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.8 continued …

Part B Continued…

MARGE LIMITED
(EXTRACTS FROM) NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X1

5. Earnings per share

Basic earnings per share

The basic earnings per ordinary share is presented on the statement of comprehensive income.
The calculation of this basic earnings per ordinary share is based on earnings of C318 182 (20X0:
C363 636) and 4 000 000 ordinary shares (20X0: 4 000 000) in issue during the year.

Headline earnings per share Note 1

Headline earnings per ordinary share C0,114 C0,091

This headline earnings per ordinary share is calculated based on earnings of C454 545 (20X0:
C363 636) and 4 000 000 ordinary shares (20X0: 4 000 000) in issue during the year.

Reconciliation of earnings 20X1 20X0

C C
Profit for the year Given 400 000 450 000
Preference dividends Fixed div: 500 000 x C1 x Coupon: 10% (50 000) (50 000)
Basic earnings 350 000 400 000
- ordinary share W1 318 182 363 636
- participating preference share W1 31 818 36 364
Add back: Loss on sale of land Note 2 150 000 0
Headline earnings 500 000 400 000
- ordinary share 454 545 363 636
- participating preference share 45 455 36 364

Note 1:
This ‘headline earnings per share’ figure may also be referred to as ‘basic headline earnings per share’.

Note 2:
A headline adjustment is required since the loss on sale of a non-current asset should be excluded on
the basis that it is a re-measurement of an asset or liability that constitutes the business platform and
details of which IFRSs requires separate disclosure.

 Service & Kolitz, 2018 Chapter 24: Page 26

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.8 continued …

Part B Continued…

Workings

W1: Earnings split 20X1 20X0

C C
Basic earnings in total 350 000 400 000
10
- ordinary share /11 x 350 000; 10/11 x 400 000 318 182 363 636
1
- participating preference share /11 x 350 000; 1/11 x 400 000 31 818 36 364

Or:
20X1: X + 1/10 X = 350 000; therefore X = 318 182 (See detailed calculation below)
And 20X0: X + 1/10 X = 400 000; therefore X = 363 636 (See detailed calculation below)
Check:
Share belonging to participating preference shares =
20X1: 1/10 x ordinary share = 1/10 x 318 181 = 31 818
20X0: 1/10 x ordinary share = 1/10 x 363 636 = 36 364

Headline earnings in total 500 000 400 000

10
- ordinary share /11 x 500 000; 10/11 x 400 000 454 545 363 636
1
- participating preference share /11 x 500 000; 1/11 x 400 000 45 455 36 364

Detailed calculation:
Participating preference shares are allocated 1/11 of the earnings.
This was calculated as follows:
Let X = the share of the earnings belonging to ordinary shareholders
Then substitute X into the following equation:
Earnings = portion belonging to ordinary shareholders + portion belonging to participating
preference shares
Earnings = X + 1/10 X
Earnings = 10/10 X + 1/10 X
Earnings = 11/10 X
X = Earnings x 10/11

W2: Participating preference dividends 20X1 20X0

C C
Fixed dividend [500 000 x C1 x 10%] 50 000 50 000
Participating dividend [1/10 of ordinary dividend] 12 000 10 000
62 000 60 000

 Service & Kolitz, 2018 Chapter 24: Page 27

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.8 continued …

Part C

W1: Basic earnings

Basic earnings belonging to participating preference shareholders 20X1 20X0

C C
Attributable basic earnings Part A or B: W1 31 818 36 364
Add back fixed preference dividend 500 000 x C1 x 10% 50 000 50 000
Basic earnings belonging to participating preference share 81 818 86 364

Basic earnings per participating preference shareholders 20X1 20X0

C C
Basic earnings belonging to participating preference share 81 818 86 364
Number of participating preference shares 500 000 500 000

Basic earnings per participating preference share C0,164 C0,173

W2: Headline earnings

Headline earnings belonging to participating preference shareholders 20X1 20X0

C C
Attributable headline earnings Part B: W1 45 455 36 364
Add back fixed preference dividend 500 000 x C1 x 10% 50 000 50 000
Headline earnings belonging to participating preference share 95 455 86 364

Headline earnings per participating preference shareholders 20X1 20X0

C C
Headline earnings belonging to participating preference share 95 455 86 364
Number of participating preference shares 500 000 500 000

Headline earnings per participating preference share C0,191 C0,173

 Service & Kolitz, 2018 Chapter 24: Page 28

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.9

Part A

a) Earnings per share in 20X4 financial statements

THOMAS LIMITED
(EXTRACT FROM) STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X4
20X4 20X3 20X2
Calculations C C C
Profit for the year Calcs 1; 2; 3 180 000 150 000 100 000
Other comprehensive income for the year Calcs 4 - - -
Total comprehensive income for the year 180 000 150 000 100 000

Basic earnings per share Calcs 5; 6; 7 0,438 0,534 0,635

Calculations:
1. 20X2: The entity was incorporated on 1 January 20X2 and thus the retained earnings balance of
C100 000 at 31 December 20X2 is assumed to be the profit for 20X2 = C100 000
2. 20X3: We assume that the movement in the retained earnings balance from 20X2 to 20X3reflects
the profit earned in 20X3: retained earnings at 31 December 20X3: C250 000 – retained
earnings balance at 31 December 20X2: C100 000 = Profit for 20X3: C150 000
3. Given
4. We are told that there are no other reserves so there can be no ‘other comprehensive income’.
5. 20X2: 90 000 / 141 687
6. 20X3: 140 000 / 262 120
7. 20X4: 170 000 / 388 064

THOMAS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X4

8. Earnings per share

Basic earnings per share

The basic earnings per ordinary share is presented on the statement of comprehensive income.
This basic earnings per share is calculated based on earnings of C170 000 (20X3: C140 000 and 20X2:
C90 000) and a weighted average number of shares after taking into account the share issues of 388 064
(20X3: 262 120 and 20X2: 141 687) outstanding during the year. Comparatives have been restated.

Reconciliation of earnings 20X4 20X3 20X2

C C C C C C C
G Gross Net Gross Net Gross Net

Profit for the period 180 000 150 000 100 000
Preference dividends (10 000) (10 000) (10 000)
Basic earnings 170 000 140 000 90 000

 Service & Kolitz, 2018 Chapter 24: Page 29

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.9 continued …

Part A Continued…

a) continued . . .
Workings

W1. Number of shares Date Actual 20X4 20X3 20X2

Opening balance 20X2 0 0
Issue 1/1/20X2 100 000 100 000
Closing balance 20X2 100 000 100 000 100 000
Issue 30/6/20X3 170 000 85 000 0
170 000 x 6/12 = 85 000
Closing balance 20X3 270 000 270 000 185 000 100 000
Rights issue: for value 30/5/20X4 6 667 3 889 0 0
Actual: 10 000 x 6 / 9;
20X4 (weighted): 10 000 x 6 / 9 x 7/12
276 667 273 889 185 000 100 000
Rights issue: for no value 3 333 3 300 2 229 1 205
Actual: 10 000 - 6 667 = 3 333
20X4 (adjusted): 3 333 / 276 667 x 273 889;
20X3 (adjusted): 3 333 / 276 667 x 185 000;
20X2 (adjusted): 3 333 / 276 667 x 100 000
280 000 277 189 187 229 101 205
Capitalisation issue: for no value 112 000 110 875 74 891 40 482
Actual: 280 000 / 5 x 2 = 112 000
20X4 (adjusted): 112 000 / 280 000 x 277 189;
20X3 (adjusted): 112 000 / 280 000 x 187 229;
20X2(adjusted): 112 000 / 280 000 x 101 205 30/11/20X4
Closing balance 20X4 392 000 388 064 262 120 141 687

 Service & Kolitz, 2018 Chapter 24: Page 30

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.9 continued …

Part A Continued…

b) Earnings per share in 20X3 financial statements

20X3 20X2
C C
Basic and headline earnings 140 000 90 000
Number of shares 185 000 100 000

0,757 0,900

c) Journal entries

Journals Debit Credit

Bank (10 000 x 6) 60 000
Ordinary shares (10 000 x 1) 60 000
Ordinary shares issued at C6 (market price of C9)

Retained earnings 15 000

Share issue expenses 15 000
Share issue expenses written off

Retained earnings (bal) 112 000

Ordinary share capital (112 000 x C1) 112 000
Capitalisation issue of ordinary shares using the rest of the share
premium balance:
112 000 (per table) x C1; or
(100K + 170K + 10K) / 5 x 2 x C1

Preference dividends 10 000

Bank 10 000
Preference dividends paid: per note or 50K x C2 x 10%

 Service & Kolitz, 2018 Chapter 24: Page 31

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.9 continued …

Part B

a) Earnings per share in 20X4 financial statements

THOMAS LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X4
20X4 20X3 20X2
Calculations C C C
Profit for the year Calcs 1; 2; 3 180 000 150 000 100 000
Other comprehensive income for the year Calcs 4 - - -
Total comprehensive income for the year 180 000 150 000 100 000

Basic earnings per share Calcs 5; 6; 7 0,438 0,534 0,635

Calculations:
1. 20X2: The entity was incorporated on 1 January 20X2 and thus the retained earnings balance of
C100 000 at 31 December 20X2 is assumed to be the profit for 20X2 = C100 000
2. 20X3: We assume that the movement in the retained earnings balance from 20X2 to 20X3reflects
the profit earned in 20X3: retained earnings at 31 December 20X3: C250 000 – retained
earnings balance at 31 December 20X2: C100 000 = Profit for 20X3: C150 000
3. Given
4. We are told that there are no other reserves so there can be no ‘other comprehensive income’.
5. 20X2: 90 000 / 141 687
6. 20X3: 140 000 / 262 120
7. 20X4: 170 000 / 388 064

 Service & Kolitz, 2018 Chapter 24: Page 32

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.9 continued …

Part B continued ...

a) continued ...

THOMAS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X4

8. Earnings per share

Basic earnings per share

The basic earnings per ordinary share is presented on the statement of comprehensive income.

This basic earnings per share is calculated based on earnings of C170 000 (20X3: C140 000 and 20X2:
C90 000) and a weighted average number of shares after taking into account the share issues of 388 064
(20X3: 262 120 and 20X2: 141 687) outstanding during the year. Comparatives have been restated.

Headline earnings per share Note 1

20X4 20X3 20X2
C C C
Headline earnings per share 0,515 0,534 0,635
20X4: 200 000 / 388 064; 20X3: 140 000 / 262 120; 20X2: 90 000 / 141 687

This headline earnings per share is calculated based on earnings of C200 000 (20X3: C140 000 and
20X2: C90 000) and a weighted number of ordinary shares of 388 064 (20X3: 262 120 and 20X2:
141 687). Comparatives have been restated.

Reconciliation of earnings 20X4 20X3 20X2

C C C C C C C
G Gross Net Gross Net Gross Net

Profit for the period 180 000 150 000 100 000
Preference dividends (10 000) (10 000) (10 000)
Basic earnings 170 000 140 000 90 000
Loss on sale of land 30 000 30 000 0 0 0 0
Headline earnings 200 000 140 000 90 000

Note 1:
This ‘headline earnings per share’ figure may also be referred to as ‘basic headline earnings per share’.

 Service & Kolitz, 2018 Chapter 24: Page 33

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.9 continued …

Part B continued ...

a) continued . . .
Workings

W1. Number of shares Date Actual 20X4 20X3 20X2

Opening balance 20X2 0 0
Issue 1/1/20X2 100 000 100 000
Closing balance 20X2 100 000 100 000 100 000
Issue 30/6/20X3 170 000 85 000 0
170 000 x 6/12 = 85 000
Closing balance 20X3 270 000 270 000 185 000 100 000
Rights issue: for value 30/5/20X4 6 667 3 889 0 0
Actual: 10 000 x 6 / 9;
20X4 (weighted): 10 000 x 6 / 9 x 7/12
276 667 273 889 185 000 100 000
Rights issue: for no value 3 333 3 300 2 229 1 205
Actual: 10 000 - 6 667 = 3 333
20X4 (adjusted): 3 333 / 276 667 x 273 889;
20X3 (adjusted): 3 333 / 276 667 x 185 000;
20X2 (adjusted): 3 333 / 276 667 x 100 000
280 000 277 189 187 229 101 205
Capitalisation issue: for no value 112 000 110 875 74 891 40 482
Actual: 280 000 / 5 x 2 = 112 000
20X4 (adjusted): 112 000 / 280 000 x 277 189;
20X3 (adjusted): 112 000 / 280 000 x 187 229;
20X2(adjusted): 112 000 / 280 000 x 101 205 30/11/20X4
Closing balance 20X4 392 000 388 064 262 120 141 687

 Service & Kolitz, 2018 Chapter 24: Page 34

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.9 continued …

Part B continued…

b) Earnings per share in 20X3 financial statements

20X3 20X2
C C
Basic and headline earnings 140 000 90 000
Number of shares 185 000 100 000

0,757 0,900

c) Journal entries

Journals Debit Credit

Bank (10 000 x 6) 60 000
Ordinary shares (10 000 x 1) 60 000
Ordinary shares issued at C6 (market price of C9)

Retained earnings 15 000

Share issue expenses 15 000
Share issue expenses written off

Retained earnings (bal) 112 000

Ordinary share capital (112 000 x C1) 112 000
Capitalisation issue of ordinary shares using the rest of the share
premium balance:
112 000 (per table) x C1; or
(100K + 170K + 10K) / 5 x 2 x C1

Preference dividends 10 000

Bank 10 000
Preference dividends paid: per note or 50K x C2 x 10%

 Service & Kolitz, 2018 Chapter 24: Page 35

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.10

Part A

a) 20X9 financial statements

ANNE LIMITED
(EXTRACTS FROM0 STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X9
20X9 20X8
Note C C

Profit for the year 700 000 900 000

Other comprehensive income 0 0
Total comprehensive income 700 000 900 000

Basic earnings per share (20X9: C500 000/ 63 462) 25 C7,88 C17,98
(20X8: C700 000/ 38 943)

Comment:
If you wanted to show 2 years of comparatives in 20X9, then the 20X7 earnings per share (both basic
and headline) would be calculated using 25 962 as the weighted average number of shares.

ANNE LIMITED
NOTES TO THE FINANCIAL STATEMENT (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X9

25. Earnings per share

Basic earnings per share

Basic earnings per share is calculated based on earnings of C500 000 (20X8: C700 000) and a weighted
average number of shares of 63 462 (20X8: 38 943).

Reconciliation of earnings 20X9 20X8

C C C C
Gross Net Gross Net
Profit/(loss) for the period 700 000 900 000
Preference dividends (200 000) (200 000)
Basic earnings 500 000 700 000

 Service & Kolitz, 2018 Chapter 24: Page 36

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.10 continued ….

Part A continued ...

b) 20X8 financial statements

ANNE LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8
20X8 20X7
Note C C
Profit for the year 900 000 800 000
Other comprehensive income 0 0
Total comprehensive income 900 000 800 000

Basic earnings per share (20X8: C700 000 / 22 500) 25 C31,11 C40,00
(20X7: C600 000 / 15 000)

ANNE LIMITED
NOTES TO THE FINANCIAL STATEMENT (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8

25. Earnings per share

Basic earnings per share

This basic earnings per share is calculated based on earnings of C700 000 (20X7: C600 000) and a
weighted average number of shares of 22 500 (20X7: 15 000).

Reconciliation of profit to earnings 20X8 20X7

C C C C
Gross Net Gross Net
Profit/(loss) for the period 900 000 800 000
Preference dividends (200 000) (200 000)
Basic earnings 700 000 600 000

 Service & Kolitz, 2018 Chapter 24: Page 37

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.10 continued ….

Part A continued ...

Solution 24.10 continued ….

Part A continued ...

Workings:

W1: Calculation of number of shares

Actual 20X9 20X8 20X7

Balance 20X6 10 000 10 000
Issue: 30/6/X7 10 000 x 6/12 10 000 5 000
Balance 20X7 20 000 20 000 15 000
issue: 30/9/X8 10 000 x 3/12 10 000 2 500 0
Balance 20X8 30 000 30 000 22 500 15 000
Rights issue:
30/6/X9 30 000 / 3 x 2 = 20 000

- for value 20 000 x 10 / 15 x 6/12 13 333 6 667 0 0

43 333 36 667 22 500 15 000
- for no value 20 000 – 13 333 6 667 5 641 3 462 2 308
(6 667/ 43 333) x 36 667; x 22 500; x 15 000

50 000 42 308 25 962 17 308

Share split 50 000 / 2 x 3 – 50 000 25 000 21 154 12 981 8 654
(25 000 / 50 000) x 42 308; x 25 962; x 17 308

Balance 20X9: 50 000 / 2 x 3 75 000 63 462 38 943 25 962

 Service & Kolitz, 2018 Chapter 24: Page 38

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.10 continued ….

Part B

a) 20X9 financial statements

ANNE LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X9
20X9 20X8
Note C C
Profit for the year 700 000 900 000
Other comprehensive income 0 0
Total comprehensive income 700 000 900 000

Basic earnings per share (20X9: C500 000/ 63 462) 25 C7,88 C17,98
(20X8: C700 000/ 38 943)

Comment:
If you wanted to show 2 years of comparatives in 20X9, then the 20X7 earnings per share (both basic
and headline) would be calculated using 25 962 as the weighted average number of shares.

ANNE LIMITED
NOTES TO THE FINANCIAL STATEMENT (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X9

25. Earnings per share

Basic earnings per share

The basic earnings per ordinary share is presented on the statement of comprehensive income.
This basic earnings per share is calculated based on earnings of C500 000 (20X8: C700 000) and a
weighted average number of shares of 63 462 (20X8: 38 943).

Headline earnings per share Note 1 20X9 20X8

Note C C
Headline earnings per share (20X9: C400 000 / 63 462) 25 6,30 12,84
(20X8: C500 000 / 38 943)
This headline earnings per share is calculated based on earnings of C400 000 (20X8: C500 000) and a
weighted number of shares of 63 462 (20X8: 38 943)

Reconciliation of earnings 20X9 20X89

C C C C
Gross Net Gross Net
Profit/(loss) for the period 700 000 900 000
Preference dividends (200 000) (200 000)
Basic earnings 500 000 700 000
Profit on sale of land (125 000) (100 000) (250 000) (200 000)
Headline earnings 400 000 500 000

Comment:
When disclosing headline earnings per share, we must remember that we may only disclose it in the
notes – never on the face of the financial statements.
Note 1:
This ‘headline earnings per share’ figure may also be referred to as ‘basic headline earnings per share’.

 Service & Kolitz, 2018 Chapter 24: Page 39

 Solutions to GAAP : Graded Questions Earnings per share

Solution 24.10 continued ….

Part B continued ...

b) 20X8 financial statements

ANNE LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8
20X8 20X7
Note C C
Profit for the year 900 000 800 000
Other comprehensive income 0 0
Total comprehensive income 900 000 800 000

Basic earnings per share (20X8: C700 000 / 22 500) 25 C31,11 C40,00
(20X7: C600 000 / 15 000)

ANNE LIMITED
NOTES TO THE FINANCIAL STATEMENT (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8

25. Earnings per share

Basic earnings per share

The basic earnings per ordinary share is presented on the statement of comprehensive income.

This basic earnings per share is calculated based on earnings of C700 000 (20X7: C600 000) and a
weighted average number of shares of 22 500 (20X7: 15 000).

Headline earnings per share Note 1 20X8 20X7

Note C C
Headline earnings per share (20X8: C500 000 / 22 500) 25 22,22 20,00
(20X7: C300 000 / 15 000)

Headline earnings per share is calculated based on earnings of C500 000 (20X7: C300 000) and a
weighted number of ordinary shares of 22 500 (20X7: 15 000).

Reconciliation of profit to earnings 20X8 20X7

C C C C
Gross Net Gross Net
Profit/(loss) for the period 900 000 800 000
Preference dividends (200 000) (200 000)
Basic earnings 700 000 600 000
Profit on sale of land (250 000) (200 000) (375 000) (300 000)
Headline earnings 500 000 300 000

Comment:
When disclosing headline earnings per share, we must remember that we may only disclose it in the
notes – never on the face of the financial statements.
Note 1:
This ‘headline earnings per share’ figure may also be referred to as ‘basic headline earnings per share’.

 Service & Kolitz, 2018 Chapter 24: Page 40

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.10 continued ….

Part B continued ...

Workings:

W1: Calculation of number of shares

Actual 20X9 20X8 20X7

Balance 20X6 10 000 10 000
issue: 30/6/X7 10 000 x 6/12 10 000 5 000
Balance 20X7 20 000 20 000 15 000
issue: 30/9/X8 10 000 x 3/12 10 000 2 500 0
Balance 20X8 30 000 30 000 22 500 15 000
rights issue:
30/6/X9 30 000 / 3 x 2 = 20 000

- for value 20 000 x 10 / 15 x 6/12 13 333 6 667 0 0

43 333 36 667 22 500 15 000
- for no value 20 000 – 13 333 6 667 5 641 3 462 2 308
(6 667/ 43 333) x 36 667; x 22 500; x 15 000

50 000 42 308 25 962 17 308

split 50 000 / 2 x 3 – 50 000 25 000 21 154 12 981 8 654
(25 000 / 50 000) x 42 308; x 25 962; x 17 308

Balance 20X9: 50 000 / 2 x 3 75 000 63 462 38 943 25 962

 Service & Kolitz, 2018 Chapter 24: Page 41

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.11

Part A

AUSSIE LIMITED
(EXTRACT FROM) STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 20X3
Notes 20X3 20X2
C C

Basic earnings / (loss) per share 20X3: 443 500 /420 000; 14 1,06 (0,06)
20X2: (23 500)/ 405 000

AUSSIE LIMITED
(EXTRACT FROM) STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 20X3
20X3 20X2
C C
Dividend per ordinary share 20X3: 105 000 / 420 000 0,25 0,00
20X2: 0 / 350 000

Dividend per 9% preference share 20X3: 27 000 / 150 000 0,18 0,00
20X2: 0 / 150 000

Dividend per 12% preference share 20X3: 18 000 / 150 000 0,12 0,00
20X2: 0 / 150 000

AUSSIE LIMITED
(EXTRACT FROM) NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 SEPTEMBER 20X3

14. Earnings per share

Basic earnings per share

Basic earnings per share is based on profit / (loss) of C443 500 (20X2: loss of C23 500) and on the
weighted average of 420 000 shares in issue (20X2: 405 000) after the capitalisation issue on 15 June
20X3. The earnings per share for 20X2 have been adjusted accordingly.

Reconciliation of profit to earnings 20X3 20X2

C C C C
Gross Net Gross Net
Profit/(loss) for the year 475 000 (10 000)
Preference dividends (13 500 + 18 000) (13 500 + 0) (31 500) (13 500)
Basic earnings / (loss) 443 500 (23 500)

Comment:
Notice that we deduct the preference dividend that should have been declared in the case of the 9%
preference shares (150 000 x C1 x 9% = C13 500) since these are cumulative shares, whereas we
deduct the actual preference dividend that was declared in the case of the 12% preference shares (given
as C18 000 in 20X3 and C0 in 20X2) since these are non-cumulative shares.

 Service & Kolitz, 2018 Chapter 24: Page 42

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.11 continued . . .

Part A continued..

Workings

W1: Number of equity shares Actual 20X3 20X2

Balance 1 October X1 300 000 300 000 300 000

Issue at market price 1 January X2 20X2: 50 000 X 9/12 50 000 50 000 37 500

350 000 350 000 337 500

Capitalisation issue 15 June X3 20X2: 337,5K/ 350K x 70K 70 000 70 000 67 500
or: 337,5K x 1/5
20X3: 350K/ 350K x 70K
Balance 30 September X2 420 000 420 000 405 000

 Service & Kolitz, 2018 Chapter 24: Page 43

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.11 continued . . .

Part B

AUSSIE LIMITED
(EXTRACT FROM) STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 20X3
Notes 20X3 20X2
C C

Basic earnings / (loss) per share 20X3: 443 500 /420 000; 14 1,06 (0,06)
20X2: (23 500)/ 405 000

AUSSIE LIMITED
(EXTRACT FROM) STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 20X3
20X3 20X2
C C
Dividend per ordinary share 20X3: 105 000 / 420 000 0,25 0,00
20X2: 0 / 350 000

Dividend per 9% preference share 20X3: 27 000 / 150 000 0,18 0,00
20X2: 0 / 150 000

Dividend per 12% preference share 20X3: 18 000 / 150 000 0,12 0,00
20X2: 0 / 150 000

 Service & Kolitz, 2018 Chapter 24: Page 44

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.11 continued . . .

Part B continued ...

AUSSIE LIMITED
(EXTRACT FROM) NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 SEPTEMBER 20X3

14. Earnings per share

Basic earnings per share

The basic earnings per ordinary share is presented on the statement of comprehensive income.

The calculation of basic earnings per share is based on profit / (loss) of C443 500 (20X2: loss of C23 500)
and on the weighted average of 420 000 shares in issue (20X2: 405 000) after the capitalisation issue on
15 June 20X3. The earnings per share for 20X2 have been adjusted accordingly.

Headline earnings per share Note 1 20X3 20X2

C C
Headline earnings per share 20X3: 513 500 / 420 000; 1,22 (0,16)
20X2: (66 250) / 405 000

The calculation of headline earnings per share is based on earnings of C513 500 (20X2: loss of C66 250)
and a weighted average of 420 000 (20X2: 405 000) shares in issue after the capitalisation issue on
15 June 20X3. The headline earnings per share for 20X2 have been adjusted accordingly.

Reconciliation of profit to earnings 20X3 20X2

C C C C
Gross Net Gross Net
Profit/(loss) for the year 475 000 (10 000)
Preference dividends (13 500 + 18 000) (13 500) (31 500) (13 500)
Basic earnings 443 500 (23 500)
(Profit) / loss on sale of land 70 000 70 000 (50 000) (42 750)
Headline earnings 513 500 (66 250)

Note 1:
This ‘headline earnings per share’ figure may also be referred to as ‘basic headline earnings per share’

 Service & Kolitz, 2018 Chapter 24: Page 45

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.11 continued . . .

Part B Continued…

Workings

W1: Number of equity shares Actual 20X3 20X2

Balance 1 October X1 300 000 300 000 300 000

Issue at market price 1 Jan X2 20X2: 50 000 x 9/12 50 000 50 000 37 500

350 000 350 000 337 500

Capitalisation issue 15 June X3 20X2: 337,5K/ 350K x 70K 70 000 70 000 67 500
or: 337,5K x 1/5
20X3: 350K/ 350K x 70K
Balance 30 September X2 420 000 420 000 405 000

 Service & Kolitz, 2018 Chapter 24: Page 46

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.12

a) True.

Basic and diluted EPS must be presented on the face of the Statement of Comprehensive
Income and must be presented with equal prominence. See IAS 33.15

b) True.

Where the profit or loss for the year is constituted by profit or loss from a continuing
operation and a profit or loss from a discontinued operation, we must present and disclose
the diluted EPS (and also the basic EPS) from the continuing operations separately from
the diluted EPS (and also the basic EPS) from the discontinued operation. See IAS 33.66 & .68
The diluted EPS (and also the basic EPS) from the continuing operations must be
presented separately from the diluted EPS (and also the basic EPS) from the entire
operation. See IAS 33.66

c) False.

Only dilutive potential ordinary shares are used in calculating diluted EPS.

d) True.

Potential ordinary shares are weighted for the period they are outstanding. This means,
for example, that:
 potential ordinary shares that are cancelled or allowed to lapse during the period are
included in diluted earnings per share only for the part of the period during which
they were outstanding; and
 potential ordinary shares that are converted into ordinary shares during the period are
included in diluted earnings per share only up to the date of conversion.

Potential ordinary shares are included in the calculation of diluted earnings per share:
 weighted from the beginning of the year, or
 if the potential ordinary share was issued during the year, then from the date of the
issue.

e) True.

Where, for example, an instrument (e.g. a debenture) may be settled by converting it into
ordinary shares or redeeming it for cash, whether this choice of settlement is to be made
by the entity or the holder of the instrument, we always assume that the settlement will be
made by way of a conversion into ordinary shares. As a result these potential ordinary
shares are included in the diluted earnings per share computation.

f) False.

Options are the most dilutive of potential ordinary shares.

 Service & Kolitz, 2018 Chapter 24: Page 47

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.13

SUPERNATURAL LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5
C

Profit for the year 30 000 000

Other comprehensive income 0
Total comprehensive income 30 000 000

Earnings per share:

Basic earnings per share 30 000 000 ÷ 200 000 000 0,15
Diluted earnings per share 31 050 000 ÷ 280 000 000 0,11

SUPERNATURAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5

15 Earnings per share

Basic earnings per share:

Basic earnings per share is based on earnings of C30 000 000(20X4: xxx) and a weighted average
of 20 000 000 ordinary shares in issue (20X4: xxx).

Diluted earnings per share:

Diluted earnings per share is based on earnings of C31 050 000 (20X4: xxx) and 180 000 000
(20X4: xxx) ordinary shares in issue.

Reconciliation of profit to earnings 20X5 20X4

C’000 C’000 C’000 C’000
Gross Net Gross Net
Profit for the period 30 000 xxx
Preference dividends 0 xxx
Basic earnings 30 000 xxx
Finance charges avoided on notionally (1 500) (1 050) xxx
converted debentures
Diluted earnings 31 050 xxx

Reconciliation of number of shares: 20X5 20X4

Qty Qty
‘000 ‘000
Basic number of shares 20% x 1 000 000 000 200 000 xxx
Notionally converted debentures 400 000 / 1 x 200 80 000 xxx
Diluted number of shares 280 000 xxx

 Service & Kolitz, 2018 Chapter 24: Page 48

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.14

Part A

FRAXEL LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
Notes C C

Profit/ (loss) for the year 125 000 (50 000)

Other comprehensive income 0 0
Total comprehensive income 125 000 (50 000)
Earnings per share:
Basic earnings per share 15 1,116 (0,495)
Diluted earnings per share 15 1,052 (0,464)

FRAXEL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5
15. Earnings per share
Basic earnings per share:

The calculation of basic earnings per share is based on earnings of C125 000 (20X4: loss of
C50 000) and a weighted average of 112 000 shares in issue (20X4: 101 000).
Diluted earnings per share:

The calculation of diluted earnings per share is based on earnings of C125 000 (20X4: loss of
C50 000) and a weighted average of 118 818 shares in issue (20X4: 107 818).

Reconciliation of earnings 20X5 20X4

C C
Profit for the year 125 000 (50 000)
Preference dividends 0 0
Basic earnings and diluted earnings 125 000 (50 000)
Reconciliation of number of shares: 20X5 20X4
Number Number
Basic number of shares 112 000 101 000
 Notionally exercised options 6 818 6 818
Diluted number of shares 118 818 107 818

 Service & Kolitz, 2018 Chapter 24: Page 49

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.14 continued …

Part A continued ...

Workings

W1: Basic number of shares Date Actual 20X5 20X4

Weighted/ Adjusted
Actual

Balance 1/1/20X4 100 000 100 000

Issue for value 30/11/20X4 12 000 1 000
Balance 31/12/20X4 112 000 112 000 101 000
Movement 20X5 0 0 0
Balance 31/12/20X5 112 000 112 000 101 000

W2: Dilutive number of shares

Options (bonus/ free portion) 25 000 – (25 000 x 2,00) ÷ 2,75 = 6 818
Or 25000 x (2,75 – 2,00) ÷ 2,75

Dilutive number of shares 20X4: 101 000 (W1) + 6 818 (bonus portion of options) = 107 818
20X5: 112 000 (W1) + 6 818 (bonus portion of options) = 118 818

 Service & Kolitz, 2018 Chapter 24: Page 50

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.14

Part B

FRAXEL LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
Notes C C
Profit/ (loss) for the year 125 000 (50 000)
Other comprehensive income 0 0
Total comprehensive income 125 000 (50 000)

Earnings per share:

Basic earnings per share 15 C1,116 C(0,495)
Diluted earnings per share 15 C1,052 C(0,464)

 Service & Kolitz, 2018 Chapter 24: Page 51

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.14 continued …

Part B continued ...

FRAXEL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share

Earnings per share: basic and diluted

Basic and diluted earnings per share are presented on the statement of comprehensive income.

Basic earnings per share is calculated based on earnings of C125 000 (20X4: loss of C50 000) and a
weighted average of 112 000 shares in issue (20X4: 101 000).

Diluted earnings per share is calculated based on earnings of C125 000 (20X4: loss of C50 000) and
a weighted average of 118 818 shares in issue (20X4: 107 818).

Headline earnings per share: basic and diluted 20X5 20X4

C C
Basic headline earnings per share Note 1 20X5: C108 750 ÷112 000 0,971 (0,656)
20X4: C66 250 ÷ 101 000

Diluted headline earnings per share 20X5: C108 750 ÷ 118 818 0,915 (0,614)
20X4: C66 250 ÷ 107 818

Basic headline earnings per share Note 1is calculated based on earnings of C108 750 (20X4: loss of
C66 250) and a weighted average of 112 000 shares in issue (20X4: 101 000).

Diluted headline earnings per share is calculated based on earnings of C108 750 (20X4: loss of
C66 250) and a weighted average of 118 818 shares in issue (20X4: 107 818).

Reconciliation of earnings 20X5 20X4

C C
Profit for the year 125 000 (50 000)
Preference dividends 0 0
Basic earnings 125 000 (50 000)
Effect of potential shares on earnings 0 0
Diluted earnings 125 000 (50 000)
Less profit on sale of plant 25 000 x (100% - 35%) (16 250) 0
Less impairment reversal of plant 30 000 x (100% - 35%) 0 (19 500)
Add loss on fair value investment 5 000 x (100% - 35%) 0 3 250
Headline earnings (basic and diluted headline earnings) 108 750 (66 250)

Reconciliation of number of shares 20X5 20X4

Number Number
Basic number of shares 112 000 101 000
 Notionally exercised options 6 818 6 818
Diluted number of shares 118 818 107 818

 Service & Kolitz, 2018 Chapter 24: Page 52

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.14 continued …

Part B continued ...

Workings

W1: Weighted number of shares Date Actual 20X5 20X4

Weighted/ Adjusted
Actual

Balance 1/1/20X4 100 000 100 000

Issue for value 30/11/20X4 12 000 1 000
Balance 31/12/20X4 112 000 112 000 101 000
Movement 20X5 0 0 0
Balance 31/12/20X5 112 000 112 000 101 000

W2: Dilutive number of shares

Options (bonus/ free portion) 25 000 – (25 000 x 2,00) ÷ 2,75 = 6 818
Or 25000 x (2,75 – 2,00) ÷ 2,75

Dilutive number of shares 20X4: (6 818 + 101 000) = 107 818

20X5: (6 818 + 112 000) = 118 818

Comment:
Notice that the following re-measurements were not considered to be re-measurement adjustments for
the purpose of calculating headline earnings per share (Circular 02/2013: Section C, paragraph 21):
 amortisation of the patent is not an adjustment for HEPS since it relates to the usage of a non-
current asset (included re-measurement (ii))
 loss on investment in shares measured at fair value through profit or loss since it is a re-
measurement of a financial asset and is thus an IFRS 9 adjustment (included re-measurement (v))
 revaluation surplus because it affected other comprehensive income and not profit or loss.

Note:
1. The term ‘basic headline earnings per share’ is frequently simply called ‘headline earnings per
share’. Both terms are considered to be acceptable.

 Service & Kolitz, 2018 Chapter 24: Page 53

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.15

Part A

CHIPCHOP LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
Note C C
Profit for the year 200 000 135 000
Other comprehensive income for the year 0 0
Total comprehensive income for the year 200 000 135 000

Earnings per share 20X5: 20X4:

Calculations Calculations
Basic earnings per share 200 000 / 329 166 135 000 / 268 966 15 0,6076 0,5019
Diluted earnings per share 201 000 / 391 666 136 000 / 331 466 15 0,5132 0,4103

CHIPCHOP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share

Basic and diluted earnings per share

The calculation of the basic and diluted earnings per share are based on the following amounts:

20X5 20X4
Earnings Weighted average Earnings Weighted average
number of shares number of shares
Basic 200 000 329 166 135 000 268 966
Diluted 201 000 391 666 136 000 331 466

Reconciliation of profit to basic and diluted earnings 20X5 20X4

C C
Profit for the year 200 000 135 000
Preference dividends 0 0
Basic earnings 200 000 135 000
Options 0 0
Notionally converted preference shares 1 000 1 000
Diluted earnings 201 000 136 000

Reconciliation of number of shares 20X5 20X4

Qty Qty
Basic number of shares 329 166 268 966
Options 12 500 12 500
Preference shares 50 000 50 000
Diluted number of shares 391 666 331 466

 Service & Kolitz, 2018 Chapter 24: Page 54

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.15 continued . . .

Part A continued . . .

Workings

W1: Weighted number of shares

Actual Weighted Adjusted

20X5 20X4
1 January 20X4 250 000 250 000
30 Sept 20X4 Rights issue 250 000 / 5 x 1 share = 50 000
 for value portion 50 000 x C6 / C7.50 = 40 000 40 000 10 000
40 000 x 3/12

Subtotal: 290 000 260 000

 not for value portion 50 000 – 40 000 = 10 000 10 000 8 966
10 000 / 290 000 x 260 000
1 January 20X5 300 000 300 000 268 966
31 May 20X5 for value 50 000 x 7/12 50 000 29 166 0
31 Dec 350 000 329 166 268 966

W2: Ranking of dilutive instruments

Ranking:
Options No change to earnings +0 0,00 1
(25 000 x 4) - (25 000 x 4 x C7)/ C8 = 12 500 + 12 500
Or (25 000 x 4 x (C8 – C7)/ C8 = 12 500
Preference shares Dividends: 1 000 + 1 000 0,02 2
+ 50 000

W3: 20X5 Test whether anti-dilutive

Basic earnings per share 200 000 = 0,6076

329 166

Options 200 000 + 0 = 200 000 = 0,5854 Dilutive

329 166 + 12 500 341 666

Preference shares 200 000 + 1 000 = 201 000 = 0,5132 Dilutive

341 666 + 50 000 391 666

W4: 20X4 Test whether anti-dilutive

Basic earnings per share 135 000 = 0,5019

268 966

Options 135 000 = 135 000 = 0,4796 Dilutive

268 966 + 12 500 281 466

Preference shares 135 000 + 1 000 = 136 000 = 0,4103 Dilutive

281 466 + 50 000 331 466

 Service & Kolitz, 2018 Chapter 24: Page 55

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.15

Part B

CHIPCHOP LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
Note C C
Profit for the year 200 000 135 000
Other comprehensive income for the year 0 0
Total comprehensive income for the year 200 000 135 000

Earnings per share 20X5: Calculations 20X4: Calculations

Basic earnings per share 200 000 / 329 166 135 000 / 268 966 15 0,6076 0,5019
Diluted earnings per share 201 000 / 391 666 136 000 / 331 466 15 0,5132 0,4103

 Service & Kolitz, 2018 Chapter 24: Page 56

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.15 continued . . .

Part B continued . . .

CHIPCHOP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share

Basic and diluted earnings per share

The basic and diluted earnings per share are presented on the statement of comprehensive income.
The calculation of these earning per share figures are based on the following:
20X5 20X4
Earnings Weighted average Earnings Weighted average
number of shares number of shares
Basic 200 000 329 166 135 000 268 966
Diluted 201 000 391 666 136 000 331 466

Reconciliation of profit to earnings: basic & diluted 20X5 20X4

C C
Profit for the year 200 000 135 000
Preference dividends 0 0
Basic earnings 200 000 135 000
Options 0 0
Notionally converted preference shares 1 000 1 000
Diluted earnings 201 000 136 000

Reconciliation of number of shares 20X5 20X4

Qty Qty
Basic number of shares 329 166 268 966
Options 12 500 12 500
Preference shares 50 000 50 000
Diluted number of shares 391 666 331 466

Headline earnings per share

20X5 calculation: 20X4 calculation: 20X5 20X4
C C
Basic headline earnings per share 179 000 / 329 166 135 000 / 268 966 0,5438 0,5019
Diluted headline earnings per share 180 000 / 391 666 136 000 / 331 466 0,4596 0,4103

The calculation of these headline earning per share figures are based on the following:
20X5 20X4
Earnings Weighted average Earnings Weighted average
number of shares number of shares
Basic headline 179 000 329 166 135 000 268 966
Diluted headline 180 000 391 666 136 000 331 466

Reconciliation of earnings: basic to basic 20X5 20X4

headline and diluted headline Gross Net Gross Net
C C C C
Basic earnings 200 000 135 000
Profit on sale of plant 30 000 x 70% 30 000 (21 000) 0 0
Basic headline earnings 179 000 135 000
Options 0 0
Notionally converted preference shares 1 000 1 000
Diluted headline earnings 180 000 136 000

 Service & Kolitz, 2018 Chapter 24: Page 57

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.15 continued . . .

Part B continued . . .

Workings

W1: Weighted number of shares

Actual Weighted Adjusted

20X5 20X4
1 January 20X4 250 000 250 000
30 Sept 20X4 Rights issue 250 000 / 5 x 1 share = 50 000
 for value portion 50 000 x C6 / C7.50 = 40 000 40 000 10 000
40 000 x 3/12

Subtotal: 290 000 260 000

 not for value portion 50 000 – 40 000 = 10 000 10 000 8 966
10 000 / 290 000 x 260 000
1 January 20X5 300 000 300 000 268 966
31 May 20X5 for value 50 000 x 7/12 50 000 29 166 0
31 Dec 350 000 329 166 268 966

W2: Ranking of dilutive instruments

Ranking:
Options No change to earnings +0 0,00 1
(25 000 x 4) - (25 000 x 4 x C7)/ C8 = 12 500 + 12 500
Or (25 000 x 4 x (C8 – C7)/ C8 = 12 500
Preference shares Dividends: 1 000 + 1 000 0,02 2
+ 50 000

W3: 20X5 Test whether anti-dilutive

Basic earnings per share 200 000 = 0,6076

329 166

Options 200 000 + 0 = 200 000 = 0,5854 Dilutive

329 166 + 12 500 341 666

Preference shares 200 000 + 1 000 = 201 000 = 0,5132 Dilutive

341 666 + 50 000 391 666

W4: 20X4 Test whether anti-dilutive

Basic earnings per share 135 000 = 0,5019

268 966

Options 135 000 = 135 000 = 0,4796 Dilutive

268 966 + 12 500 281 466

Preference shares 135 000 + 1 000 = 136 000 = 0,4103 Dilutive

281 466 + 50 000 331 466

 Service & Kolitz, 2018 Chapter 24: Page 58

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.16

COUSINS LIMITED
EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X8
20X8 20X7
C C
Profit for the year 650 000 550 000
Other comprehensive income 0 0
Total comprehensive income 650 000 550 000

Basic earnings per ordinary share 20X8: C573 833 / 848 750 0,6761 0,5441
20X7:C482 167 / 886 250

Diluted earnings per ordinary share 20X8: C589 583/ 967 500 0,6094 0,5304
20X7:C499 197 / 942 500

COUSINS LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X8

15. Earnings per share

Basic and diluted earnings per share

The basic and diluted earnings per share are based on the following amounts:

20X8 20X7
Earnings Weighted Earnings Weighted
Average number Average number
of shares of shares
Basic 573 833 848 750 482 167 886 250
Diluted 589 583 967 500 499 917 942 500

Reconciliation of profit to earnings: profit to basic and diluted earnings

20X8 20X7
C C
Profit for the year 650 000 550 000
Preference dividends 10 000 x 20 x 12% (24 000) (24 000)
Basic earnings to be shared 626 000 526 000
- Portion to participating preference shareholders (626 000/ 12) 52 167 43 833
- Portion to ordinary shareholders (626 000/ 12 x 11) 573 833 482 167

Basic earnings belonging to ordinary shareholders 573 833 482 167

Finance costs avoided on notionally converted debentures (given) 15 750 15 750
Diluted earnings 589 583 499 917

Reconciliation of number of shares

20X8 20X7
Number Number
Basic number of shares 848 750 886 250
Options 20X5: 67 500 – (67 500 x 4/ 9) 37 500 0
20X4: nil since only issued in 20X5
Contingent shares Nil in 20X4 since conditions not met 25 000 0
Preference shares 75 000/ 4 x 3 56 250 56 250
Diluted number of shares 967 500 942 500

 Service & Kolitz, 2018 Chapter 24: Page 59

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.16 continued . . .

Workings:

W1: Number of shares

Total 20X8 20X7

Number Number Number

Balance 1 January 20X8 898 750 898 750 683 750

31 March 20X7 – for value issue 50 000 x 9/12 - 37 500
1 May 20X7 – no value issue (capitalisation issue) - 165 000
898 750 898 750 886 250
30 September 20X8: Share buy-back 200 000 x 3/12 (200 000) (50 000) -
Used in basic earnings calculations 698 750 848 750 886 250

W2: Diluted earnings per share

W2.1: Ranking in order of dilution Ranking

Options 0/ 37 500 0,00 1*

Contingently issuable shares 0/ 25 000 0,00 1*
Convertible preference shares (15 750 )/ 56 250 0,28 2
Convertible debentures 11 200/ 11 429 0,98 3
*: these two ranked tie as most dilutive

W2.2: Testing for whether dilutive or not:

Basic earnings per share 573 833/ 750 000 0,765

Cumulatively adjust for:

 Notionally exercised options (573 833 + 0 + 0)/ (750 000 + 37 500 + 25 000) 0,70625
Dilutive
and contingently issuable
shares
 Convertible preference shares (573 833 + 0 + 0 + 15 750)/ (750 000 + 37 500 0,6786 Dilutive
+ 25 000 + 56 250)
 Convertible debentures (573 833 + 0 + 0 + 15 750 + 11 200)/ (750 000 0,7025 Anti-
+ 37 500 + 25 000 + 56 250 + 11 429) dilutive

 Service & Kolitz, 2018 Chapter 24: Page 60

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17

Part A

MIDDAY LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
20X5: Calculations 20X4: Calculations Note C C

Profit for the year 500 000 337 500

Other comprehensive income 0 0
Total comprehensive income 500 000 337 500

Earnings per share:

Basic earnings per share C500 000/ 329 166 C337 500/ 268 966 15 C1,5190 C1,2548
 Continuing operations C447 500/ 329 166 C337 500/ 268 966 C1,3595 C1,2548
 Discontinued operations C52 500/ 329 166 C0,1595

Diluted earnings per share C501 000/ 395 833 C338 500/ 335 633 15 C1,2657 C1,0085
 Continuing operations C448 500/ 395 833 C338 500/ 335 633 C1,1331 C1,0085
 Discontinued operations C52 500/ 395 833 C0,1326

 Service & Kolitz, 2018 Chapter 24: Page 61

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued ...

Part A continued ...

MIDDAY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share

Basic and diluted earnings per share

The basic and diluted earnings per share figures are based on the following amounts:

20X5
Weighted Average number of
Total Earnings
shares
Basic earnings per share 500 000 329 166 W1
Diluted earnings per share 501 000 395 833 W3

20X4
Weighted Average number of
Total Earnings
shares
Basic earnings per share 337 500 268 966 W1
Diluted earnings per share 338 500 335 633 W4

Reconciliation of profit to earnings: profit to basic and diluted earnings

20X5 20X4
C C
Profit for the year 500 000 337 500
Preference dividends 0 0
Basic earnings 500 000 337 500
Options 0 0
Preference shares 1 000 1 000
Diluted earnings 501 000 338 500

Reconciliation of number of shares

20X5 20X4
Basic number of shares 329 166 268 966
Options 16 667 16 667
Preference shares 50 000 50 000
Diluted number of shares 395 833 335 633

 Service & Kolitz, 2018 Chapter 24: Page 62

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued ...

Part A continued ...

Workings

W1: Weighted number of shares Actual Weighted Adjusted

20X5 20X4
1 January 20X4 250 000 250 000
30 Sept 20X4 Rights issue 250 000/ 5 x 1 share = 50 000
 for value portion 50 000 x C6/ C7,50 = 40 000 40 000 10 000
40 000 x 3/12
Subtotal: 290 000 260 000
 not for value portion 50 000 – 40 000 = 10 000 10 000 8 966
10 000/ 290 000 x 260 000
1 January 20X5 300 000 300 000 268 966
31 May 20X5 for value 50 000 x 7/12 50 000 29 166 0
31 Dec 350 000 329 166 268 966

W2: Ranking of dilutive instruments Ranking:

Options No change to earnings +0
0,00 1
(25 000 x 4) - (25 000 x 4 x C10)/ C12 = 12 500 + 16 667
Or (25 000 x 4 x (C8 – C7)/ C8 = 12 500
Preference shares Dividends: 1 000 NOTE + 1 000
0,02 2
+ 50 000
Note:
There is no tax deduction allowed on these preference shares, therefore the C1 000 is not adjusted for
tax effects.
For your information:
IAS 33 requires the dilutive (or anti-dilutive) effect of potential ordinary shares to be determined with
reference to control earnings (i.e. earnings from continuing operations)
Of the total profit for the year, R52 500 (after tax) was earned from a discontinued operation. When
testing to determine whether the potential ordinary shares are dilutive, profit for the period excluding
profit from discontinued operations is used.
The actual calculation of diluted earnings per share will include profit from discontinued operations.
The total diluted earnings per share is then split into diluted earnings per share from continuing
operations and diluted earnings per share from discontinued operations (see extracts from the
f/statements above).

W3: 20X5 Test whether anti-dilutive

Basic earnings per share (500 000-52 500) 447 500
= 1,3595
329 166
Options 447 500 + 0 447 500
= = 1,2940 Dilutive
[(12-10)/12] x 25 000 x 4 329 166 + 16 667 345 833
Preference shares 447 500 + 1 000 448 500
= = 1,1331 Dilutive
345 833 + 50 000 395 833

W4: 20X4 Test whether anti-dilutive

Basic earnings per share 337 500
= 1,2548
268 966
Options 337 500 337 500
= = 1,1816 Dilutive
[(12-10)/12] x 25 000 x 4 268 966 + 16 667 285 633
Preference shares 337 500 + 1 000 338 500
= = 1,0085 Dilutive
285 633 + 50 000 335 633

 Service & Kolitz, 2018 Chapter 24: Page 63

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17

Part B

MIDDAY LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
20X5: Calculations 20X4: Calculations Note C C

Profit for the year 500 000 337 500

Other comprehensive income 0 0
Total comprehensive income 500 000 337 500

Earnings per share:

Basic earnings per share C500 000/ 329 166 C337 500/ 268 966 15 1,5190 1,2548
 Continuing operations C447 500/ 329 166 C337 500/ 268 966 1,3595 1,2548
 Discontinued operations C52 500/ 329 166 0,1595

Diluted earnings per share C500 000/ 345 833 C337 500/ 285 633 15 1,4458 1,1816
 Continuing operations C447 500/ 345 833 C337 500/ 285 633 1,2940 1,1816
 Discontinued operations C52 500/ 345 833 0,1518

 Service & Kolitz, 2018 Chapter 24: Page 64

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued …

Part B continued …

MIDDAY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share

Basic and diluted earnings per share

The basic and diluted earnings per share figures are based on the following amounts:

20X5
Weighted Average number of
Total Earnings
shares
Basic earnings per share 500 000 329 166 W1
Diluted earnings per share 500 000 345 833 W3

20X4
Weighted Average number of
Total Earnings
shares
Basic earnings per share 337 500 268 966 W1
Diluted earnings per share 337 500 285 633 W4

Reconciliation of profit to earnings: profit to basic and diluted earnings

20X5 20X4
C C
Profit for the year 500 000 337 500
Preference dividends 0 0
Basic earnings 500 000 337 500
Options 0 0
Preference shares Not adjusted for as anti-dilutive 0 0
Diluted earnings 500 000 337 500

Reconciliation of number of shares

20X5 20X4
number number
Basic number of shares 329 166 268 966
Options 16 667 16 667
Preference shares Not adjusted for as anti-dilutive 0 0
Diluted number of shares 345 833 285 633

 Service & Kolitz, 2018 Chapter 24: Page 65

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued …

Part B continued …

Workings

W1: Weighted number of shares Actual Weighted Adjusted

20X5 20X4
1 January 20X4 250 000 250 000
30 Sept 20X4 Rights issue 250 000/ 5 x 1 share = 50 000
 for value portion 50 000 x C6/ C7.50 = 40 000 40 000 10 000
40 000 x 3/12
Subtotal: 290 000 260 000
 not for value portion 50 000 – 40 000 = 10 000 10 000 8 966
10 000 / 290 000 x 260 000
1 January 20X5 300 000 300 000 268 966
31 May 20X5 for value 50 000 x 7/12 50 000 29 166 0
31 Dec 350 000 329 166 268 966

W2: Ranking of dilutive instruments Ranking:

Options No change to earnings +0
0,00 1
(25 000 x 4) - (25 000 x 4 x C10)/ C12 = 16 667 + 16 667
Or (25 000 x 4 x (C12 – C10)/ C12 = 16 667
Preference shares Dividends: 1 000 NOTE + 1 000
1,00 2
+ 1000

Note:

There is no tax deduction allowed on these preference shares, therefore the C1 000 is not adjusted for
tax effects.

For your information:

IAS 33 requires the dilutive (or anti-dilutive) effect of potential ordinary shares to be determined with
reference to control earnings (i.e. earnings from continuing operations)

Of the total profit for the year, C52 500 (after tax) was earned from a discontinued operation. When
testing to determine whether the potential ordinary shares are dilutive, profit for the period excluding
profit from discontinued operations is used.
The actual calculation of diluted earnings per share will include profit from discontinued operations.
The total diluted earnings per share is then split into diluted earnings per share from continuing
operations and diluted earnings per share from discontinued operations (see extracts from the financial
statements above).

 Service & Kolitz, 2018 Chapter 24: Page 66

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued …

Part B continued …

W3: 20X5 Test whether anti-dilutive

Basic earnings per share (500 000 – 52 500) 447 500
= 1,3595
329 166

Options 447 500 + 0 447 500

= 1,2940 Dilutive
[(12-10)/12] x 25 000 x 4 329 166 + 16 667 = 345 833

Preference shares 447 500 + 1 000 448 500 Anti-

= 1,2950
345 833 + 500 = 346 333 Dilutive

W4: 20X4 Test whether anti-dilutive

Basic earnings per share 337 500
= 1,2548
268 966

Options 337 500 337 500

= 1,1816 Dilutive
[(12-10)/12] x 25 000 x 4 268 966 + 16 667 = 285 633

Preference shares 337 500 + 1 000 338 500 Anti-

= 1,1830
285 633 + 500 = 286 133 Dilutive

 Service & Kolitz, 2018 Chapter 24: Page 67

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17

Part C

MIDDAY LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
20X5: Calculations 20X4: Calculations Note C C

Profit for the year 500 000 337 500

Other comprehensive income 0 0
Total comprehensive income 500 000 337 500

Earnings per share:

Basic earnings per share C500 000/ 329 166 C337 500/ 268 966 15 C1,5190 C1,2548
 Continuing operations C447 500/ 329 166 C337 500/ 268 966 C1,3595 C1,2548
 Discontinued operations C52 500/ 329 166 C0,1595

Diluted earnings per share C501 000/ 395 833 C338 500/ 335 633 15 C1,2657 C1,0085
 Continuing operations C448 500/ 395 833 C338 500/ 335 633 C1,1331 C1,0085
 Discontinued operations C52 500/ 395 833 C0,1326

 Service & Kolitz, 2018 Chapter 24: Page 68

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued ...

Part C continued ...

MIDDAY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share

Basic and diluted earnings per share

The basic and diluted earnings per share are presented on the statement of comprehensive income.
These earnings per share figures are based on the following amounts:

20X5
Weighted Average number
Total Earnings
of shares
Basic earnings per share 500 000 329 166 W1
Diluted earnings per share 501 000 395 833 W3

20X4
Weighted Average number
Total Earnings
of shares
Basic earnings per share 337 500 268 966 W1
Diluted earnings per share 338 500 335 633 W4

Reconciliation of profit to earnings: profit to basic and diluted earnings

20X5 20X4
C C
Profit for the year 500 000 337 500
Preference dividends 0 0
Basic earnings 500 000 337 500
Options 0 0
Preference shares 1 000 1 000
Diluted earnings 501 000 338 500

Reconciliation of number of shares

20X5 20X4
Basic number of shares 329 166 268 966
Options 16 667 16 667
Preference shares 50 000 50 000
Diluted number of shares 395 833 335 633

Headline earnings per share

20X5 20X4
20X5: Calculations 20X4: Calculations C C
Basic headline earnings per share 1,3595 1,2548
 Continuing operations C447 500/ 329 C337 500/ 268 966 1,3595 1,2548
166
 Discontinued operations 0,0000 0,0000

Diluted headline earnings/ share C448 500/ 395 833 C338 500/ 335 633 1,1331 1,0085
 Continuing operations C448 500/ 395 833 C338 500/ 335 633 1,1331 1,0085
 Discontinued operations 0,0000 0,0000

Note continued on the next page

 Service & Kolitz, 2018 Chapter 24: Page 69

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued ...

Part C continued ...

MIDDAY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS) continued …
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share continued …

Headline earnings per share continued …

These earnings per share figures are based on the following amounts:

20X5
Weighted Average number of
Total Earnings
shares
Basic headline earnings per share 447 500 329 166 W1
Diluted headline earnings per share 448 500 395 833 W3

20X4
Weighted Average number of
Total Earnings
shares
Basic headline earnings per share 337 500 268 966 W1
Diluted headline earnings per share 338 500 335 633 W4

Reconciliation of earnings: basic to basic headline earnings and diluted headline earnings

20X5 20X4
Gross Net Gross Net
C C C C
Basic earnings 500 000 337 500
Profit on sale of plant 75 000 x 70% 75 000 (52 500) 0
Basic headline earnings 447 500 337 500
Options 0 0
Preference shares 1 000 1 000
Diluted headline earnings 448 500 338 500

 Service & Kolitz, 2018 Chapter 24: Page 70

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued ...

Part C continued ...

Workings

W1: Weighted number of shares Actual Weighted Adjusted

20X5 20X4
1 January 20X4 250 000 250 000
30 Sept 20X4 Rights issue 250 000/ 5 x 1 share = 50 000
 for value portion 50 000 x C6/ C7,50 = 40 000 40 000 10 000
40 000 x 3/12
Subtotal: 290 000 260 000
 not for value portion 50 000 – 40 000 = 10 000 10 000 8 966
10 000/ 290 000 x 260 000
1 January 20X5 300 000 300 000 268 966
31 May 20X5 for value 50 000 x 7/12 50 000 29 166 0
31 Dec 350 000 329 166 268 966

W2: Ranking of dilutive instruments Ranking:

Options No change to earnings +0
0,00 1
(25 000 x 4) - (25 000 x 4 x C10)/ C12 = 12 500 + 16 667
Or (25 000 x 4 x (C8 – C7)/ C8 = 12 500
Preference shares Dividends: 1 000 NOTE + 1 000
0,02 2
+ 50 000
Note:
There is no tax deduction allowed on these preference shares, therefore the C1 000 is not adjusted for
tax effects.
For your information:
IAS 33 requires the dilutive (or anti-dilutive) effect of potential ordinary shares to be determined with
reference to control earnings (i.e. earnings from continuing operations)
Of the total profit for the year, C52 500 (after tax) was earned from a discontinued operation. When
testing to determine whether the potential ordinary shares are dilutive, profit for the period excluding
profit from discontinued operations is used.
The actual calculation of diluted earnings per share will include profit from discontinued operations.
The total diluted earnings per share is then split into diluted earnings per share from continuing
operations and diluted earnings per share from discontinued operations (see extracts from the
f/statements above).

W3: 20X5 Test whether anti-dilutive

Basic earnings per share (500 000-52 500) 447 500
= 1.3595
329 166
Options 447 500 + 0 447 500
= = 1.2940 Dilutive
[(12-10)/12] x 25 000 x 4 329 166 + 16 667 345 833
Preference shares 447 500 + 1 000 448 500
= = 1.1331 Dilutive
345 833 + 50 000 395 833

W4: 20X4 Test whether anti-dilutive

Basic earnings per share 337 500
= 1.2548
268 966
Options 337 500 337 500
= = 1.1816 Dilutive
[(12-10)/12] x 25 000 x 4 268 966 + 16 667 285 633
Preference shares 337 500 + 1 000 338 500
= = 1.0085 Dilutive
285 633 + 50 000 335 633

 Service & Kolitz, 2018 Chapter 24: Page 71

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17

Part D

MIDDAY LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5
20X5 20X4
20X5: Calculations 20X4: Calculations Note C C

Profit for the year 500 000 337 500

Other comprehensive income 0 0
Total comprehensive income 500 000 337 500

Earnings per share

Basic earnings per share C500 000/ 329 166 C337 500/ 268 966 15 1,5190 1,2548
 Continuing operations C447 500/ 329 166 C337 500/ 268 966 1,3595 1,2548
 Discontinued operations C52 500/ 329 166 0,1595 0,0000

Diluted earnings per share C500 000/ 345 833 C337 500/ 285 633 15 1,4458 1,1816
 Continuing operations C447 500/ 345 833 C337 500/ 285 633 1,2940 1,1816
 Discontinued operations C52 500/ 345 833 0,1518 0,0000

 Service & Kolitz, 2018 Chapter 24: Page 72

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued …

Part D continued …

MIDDAY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share

Basic and diluted earnings per share

The basic and diluted earnings per share are presented on the statement of comprehensive income.
These earnings per share figures are based on the following amounts:

20X5
Weighted Average number
Total Earnings
of shares
Basic earnings per share 500 000 329 166 W1
Diluted earnings per share 500 000 345 833 W3

20X4
Weighted Average number
Total Earnings
of shares
Basic earnings per share 337 500 268 966 W1
Diluted earnings per share 337 500 285 633 W4

Reconciliation of profit to earnings: profit to basic and diluted earnings

20X5 20X4
C C
Profit for the year 500 000 337 500
Preference dividends 0 0
Basic earnings 500 000 337 500
Options 0 0
Preference shares Not adjusted for as anti-dilutive 0 0
Diluted earnings 500 000 337 500

Reconciliation of number of shares: basic to diluted number of shares

20X5 20X4
number number
Basic number of shares 329 166 268 966
Options 16 667 16 667
Preference shares Not adjusted for as anti-dilutive 0 0
Diluted number of shares 345 833 285 633

Headline earnings per share

20X5 20X4

20X5: Calculations 20X4: Calculations C C

Headline earnings per share 1,3595 1,2548
 Continuing operations C447 500/ 329 166 C337 500/ 268 966 1,3595 1,2548
 Discontinued operations 0,0000 0,0000

Diluted headline earnings per share 1,2940 1,1816

 Continuing operations C447 500/ 345 833 C337 500/ 285 633 1,2940 1,1816
 Discontinued operations 0,0000 0,0000
Note continued on the next page

 Service & Kolitz, 2018 Chapter 24: Page 73

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued …

Part D continued …

MIDDAY LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS)
FOR THE YEAR ENDED 31 DECEMBER 20X5

15. Earnings per share continued …

Headline earnings per share continued …

These earnings per share figures are based on the following amounts:

20X5
Weighted Average number of
Total Earnings
shares
Basic headline earnings per share 447 500 329 166 W1
Diluted headline earnings per share 447 500 345 833 W3

20X4
Weighted Average number of
Total Earnings
shares
Basic headline earnings per share 337 500 268 966 W1
Diluted headline earnings per share 337 500 285 633 W4

Reconciliation of earnings: basic earnings to headline and diluted headline earnings

20X5 20X4
Gross Net Gross Net
C C C C
Basic earnings 500 000 337 500
Profit on sale of plant 75 000 x 70% 75 000 (52 500) 0 0
Basic headline earnings 447 500 337 500
Options 0 0
Preference shares (not adjusted for because anti-dilutive) 0 0
Diluted headline earnings 447 500 337 500

 Service & Kolitz, 2018 Chapter 24: Page 74

Solutions to GAAP : Graded Questions Earnings per share

Solution 24.17 continued …

Part D continued …

Workings

W1: Weighted number of shares Actual 20X5 20X4

Weighted Adjusted
1 January 20X4 250 000 250 000
30 Sept 20X4 Rights issue 250 000/ 5 x 1 share = 50 000
 for value portion 50 000 x C6/ C7.50 = 40 000 40 000 10 000
40 000 x 3/12
Subtotal: 290 000 260 000
 not for value portion 50 000 – 40 000 = 10 000 10 000 8 966
10 000 / 290 000 x 260 000
1 January 20X5 300 000 300 000 268 966
31 May 20X5 for value 50 000 x 7/12 50 000 29 166 0
31 Dec 350 000 329 166 268 966

W2: Ranking of dilutive instruments Ranking:

Options No change to earnings +0
0,00 1
(25 000 x 4) - (25 000 x 4 x C10)/ C12 = 16 667 + 16 667
Or (25 000 x 4 x (C12 – C10)/ C12 = 16 667
Preference shares Dividends: 1 000 NOTE + 1 000
1,00 2
+ 1000
Note:
No tax deduction is allowed on these preference shares, thus the C1 000 is not adjusted for tax effects.

For your information:

IAS 33 requires the dilutive (or anti-dilutive) effect of potential ordinary shares to be determined with
reference to control earnings (i.e. earnings from continuing operations)
Of the total profit for the year, C52 500 (after tax) was earned from a discontinued operation. When
testing to determine whether the potential ordinary shares are dilutive, profit for the period excluding
profit from discontinued operations is used.
The actual calculation of diluted earnings per share will include profit from discontinued operations.
The total diluted earnings per share is then split into diluted earnings per share from continuing
operations and diluted earnings per share from discontinued operations (see extracts from the financial
statements above).

W3: 20X5 Test whether anti-dilutive

Basic earnings per share (500 000 – 52 500) 447 500
= 1,3595
329 166

Options 447 500 + 0 447 500

= 1,2940 Dilutive
[(12-10)/12] x 25 000 x 4 329 166 + 16 667 = 345 833

Preference shares 447 500 + 1 000 448 500 Anti-

= 1,2950
345 833 + 500 = 346 333 Dilutive

W4: 20X4 Test whether anti-dilutive

Basic earnings per share 337 500
= 1,2548
268 966

Options 337 500 337 500

= 1,1816 Dilutive
[(12-10)/12] x 25 000 x 4 268 966 + 16 667 = 285 633

Preference shares 337 500 + 1 000 338 500 Anti-

= 1,1830
285 633 + 500 = 286 133 Dilutive

 Service & Kolitz, 2018 Chapter 24: Page 75