ISU MODULE TEMPLATE
Subject: INTERMEDIATE ACCOUNTING III
Title of the Module
: Earnings Per Share
Learning Outcome
At the end of the chapter, the students should be able to:
Define earning per share.
Know the proper presentation of earning per share.
Know the formula in computing earnings per share.
Determine the weighted average number of ordinary shares.
EARNING PER SHARE
The earnings per share is the amount attributable to every ordinary share outstanding during the period.
Ordinary share is an equity instrument that is subordinate to all other classes of equity instrument.
The computation of earnings per share requires two presentations namely:
a. Basic earnings per share
b. Diluted earnings per share
Uses of earnings per share
a. It is determinant of the market price of ordinary share, thus indicating the attractiveness of the ordinary share
as an investment.
b. It is measure of performance of management in conducting operations.
c. It is a basis of dividend policy of an entity.
Presentation
An entity shall present on the face of the income statement basic and diluted earnings per share for income or
loss from continuing operations.
Basic earnings per share
Net Income
Basic EPS
Ordinary shares outstanding
If the preference share is cumulative, the preference dividend for the current year only is deducted from the net
income, whether such dividend is declared or not,
If the preference share is noncumulative, the preference dividend for the current year is deducted from net income
only if there is declaration.
Illustration:
For the year 2023, an entity reported net income of P3,200,000. All throughout the year, the entity maintained
200,000 outstanding ordinary shares with total par value of P20,000,000 and 8% preference shares with total par
value of P10,000,000. The preference share dividends were last paid in 2021.
Requirements: under each of the following independent scenarios, determine the Book Earnings Per Share (BEPS) for
the year 2023:
1. preference shares are cumulative, and the entity did not declare any dividends
2. preference shares are cumulative, and the entity declared the preference share dividends due and P1,000,000
dividends for ordinary shares
3. preference shares are noncumulative, and the entity did not declare any dividends
4. preference shares are noncumulative, and the entity declared preference share dividends due and P1,000,000
dividends for ordinary shares
Scenario 1: 3,200,000 – 800,000
200,000 shares
BEPS = P12.00 / share
Scenario 2: 3,200,000 – 800,000
200,000 shares
BEPS = P12.00 / share
Scenario 3: 3,200,000
200,000 shares
BEPS = P16.00 / share
Scenario 4: 3,200,000 – 800,000
200,000 shares
BEPS = P12.00 / share
Illustration:
During the current year, an entity issued a tender offer to repurchase a certain number of its preference shares.
Consequently, a total of P3,000,000 were paid to some preference shareholders. Net income for the year amounted
to P3,500,000 and P400,000 outstanding ordinary shares were maintained all throughout the year.
Requirement: under each of the following independent scenarios, determine the BEPS:
1. total carrying amount of repurchased preference shares is P2,500,000
2. total carrying amount of repurchased preference shares is P3,200,000
Scenario 1: 3,500,000 – 500,000
400,000 shares
BEPS: 7.50 / share
Scenario 2: 3,500,000 + 200,000
400,000 shares
BEPS: 9.25 / share
Illustration:
An entity provided the following information for the current year:
Preference share capital, P100 par, 10% cumulative 1,000,000
Ordinary share capital, P100par, 50,000 shares 5,000,000
Income from continuing operations 1,500,000
Income from discontinued operation 500,000
Net Income 2,000,000
Basic earnings per share
Income from continuing operations 1,500,000
Preference dividend for the current year (100,000)
Income to ordinary share 1,400,000
Income from continuing operations
(1,400,000 / 50,000 shares) 28
Income from discontinued operation
(500,000 / 50,000 shares) 10
Illustration – Participating preference share
An entity had the following structure at the end of the current year:
Ordinary share capital, P100 par, 80,000 shares 8,000,000
Preference share capital, P50 par, 40,000 shares 2,000,000
Net Income for the year 3,000,000
The preference share dividend rate is 10% and the preference share is nonconvertible but cumulative and fully
participating.
After the ordinary share has been paid a dividend of P20 per share, the preference share shall participate in any
additional dividends on a prorate basis with the ordinary share
Preference Ordinary
Basic dividend
Preference 200,000.00
Ordinary 1,600,000.00
Balance for participation 240,000.00 960,000.00
440,000.00 2,560,000.00
Net Income 3,000,000
Basic dividend 1,800,000
Balance 1,200,000
Basic Earnings per share
Preference share (440,000 / 40,000) 11.00
Ordinary share (2,560,000 / 80,000) 32.00
Determination of weighted average
Shares are usually included in the weighted number of shares from the date consideration is receivable which is
usually the date of their issue.
Illustration:
January 1 Beginning balance 100,000
March 1 Issued for cash 50,000
July 1 20% share dividend 30,000
November 1 Treasury shares (15,000)
Total shares Outstanding 165,000
Computation
Date Shares Months Outstanding Peso Months
January 1 120,000 12 P1,440,000
March 1 60,000 10 600,000
November 1 (15,000) 2 (30,000)
2,010,000
Average shares (2,010,000 / 12) 167,500
Date Shares Fraction Average
January 1 120,000 12/12 120,000
March 1 60,000 10/12 50,000
November 1 (15,000) 2/12 (2,500)
167,500
Where share dividends or share splits create a change in the capital structure, the increase or decrease in the
number of shares shall be recognized retroactively.
Illustration:
January 1 100,000 shares issued and outstanding
April 1 Issued 50,000 new shares
June 1 Share split 2 for 1
July 1 Purchased 20,000 treasury shares
October 1 20% share dividend
December 31 Share split 5 for 1
Computation
Date Shares Months Outstanding Peso Months
January 1 1,200,000 12 P14,400,000
April 1 600,000 9 5,400,000
July 1 (120,000) 6 (720,000)
19,080,000
Average shares (19,080,000 / 12) 1,590,000
Shares
January 1 (100,000 x 2 x 1.20 x 5) 1,200,000
April 1 (50,000 x 2 x 1.20 x 5) 600,000
July 1 (20,000 x 1.20 x 5) (120,000)
Date Shares Fraction Average
January 1 1,200,000 12/12 1,200,000
April 1 600,000 9/12 450,000
July 1 (120,000) 6/12 (60,000)
1,590,000
Bonus issue
In a bonus issue, ordinary shares are issued to existing shareholders for no consideration.
Therefore, the number of ordinary shares is increased without increase in resources.
A bonus issue is actually a share dividend
The number of ordinary shares outstanding is adjusted for the proportionate change in the number of ordinary
shares outstanding as if the bonus issue has occurred at the beginning of the earliest period presented.
Illustration:
Net Income – 2021 7,200,000
Net Income – 2022 6,000,000
Ordinary shares outstanding on January 1, 2021 200,000
On October 1, 2022, the entity implemented a bonus issue of ordinary shares in the ratio of two ordinary shares
for each original ordinary share.
A comparative income statement would show the following the basic earnings per share:
Basic earnings per share:
2021 (7,200,000 / 600,000) 12.00
2022 (6,000,000 / 600,000) 10.00
Ordinary shares outstanding – January 1, 2021 200,000
Bonus issue in October 1, 2022 (200,000 x 2) 400,000
Total ordinary shares outstanding 600,000
Basic loss per share
Net loss (5,000,000)
Ordinary share capital, P100 par, 100,000 shares 10,000,000
Preference share capital, P100 par, 10% cumulative, 2,000,000
20,000 shares convertible into 40,000 ordinary shares
Computation
Net loss (5,000,000)
Preference dividend (10% x 2,000,000) (200,000)
Total loss to ordinary shareholders (5,200,000)
Divide by ordinary shares actually outstanding 100,000
Basic loss per share (52)
However, if the preference share is noncumulative, the preference dividend is ignored because presumably there is
no declaration since there is a loss.
In such case, the basic loss per share is determined as:
Net loss 5,000,000
Divide by ordinary shares outstanding 100,000
Basic loss per share 50
Illustration:
An entity had 300,000 outstanding ordinary shares on January 1, 2023. In addition, it had the following equity
transactions for the current year:
March 1 issued 30,000 shares for cash
April 30 issued 18,000 shares in exchange of a land
May 31 acquired 36,000 shares to be held in treasury
July 1 issued 10,000 treasury shares
September 30received subscriptions for 40,000 shares. These were fully paid on November 30
October 31 retired 5,000 treasury shares
December 1 issued 60,000 shares for the actual conversion of bonds payable
Requirement: compute for the weighted average number of outstanding shares
Date no. of share until 12/31 time weight weighted average
01/01 300,000 12 12/12 300,000
03/01 30,000 10 10/12 25,000
04/30 18,000 8 8/12 12,000
05/31 (36,000) 7 7/12 (21,000)
07/01 10,000 6 6/12 5,000
09/30 40,000 3 3/12 10,000
10/31 - 2 2/12 -
12/01 60,000 1 1/12 5,000
Weighted average number of outstanding shares 336,000
Illustration: 2 years
At the beginning of 2022, an entity had 180,000 outstanding ordinary shares. During the next two years, it had the
following share transactions:
04/01/2022 issued 20,000 additional shares
06/30/2022 acquired 33,000 treasury shares
11/30/2022 reissued 12,000 of treasury shares
02/01/2023 issued 45,000 additional shares in exchange for a building
05/01/2023 reissued 6,000 treasury shares
10/01/2023 issued 10,000 additional shares for cash
During 2022 and 2023, the entity reported net income of P1,200,000 and P1,800,000, respectively. In addition,
during 2023, it also paid dividends of P400,000 and P700,000 to ordinary and noncumulative preference shares,
respectively.
Date no. of share until 12/31 time weight weighted average
01/01/22 180,000 12 12/12 180,000
04/01/22 20,000 9 9/12 15,000
06/30/22 (33,000) 6 6/12 (16,500)
11/30/22 12,000 1 1/12 1,000
Totals 179,000 179,500
BEPS, 2022 1,200,000
179,500 shares
P6.69 / share
Date no. of share until 12/31 time weight weighted average
01/01/23 179,000 12 12/12 179,000
02/01/23 45,000 11 11/12 41,250
05/01/23 6,000 8 8/12 4,000
10/01/23 10,000 3 3/12 2,500
Totals 240,000 226,750
BEPS, 2023 1,800,000 – 700,000
226,750 shares
P4.85 / share
The actual dividend declaration on noncumulative preference shares shall be deducted. On the other hand,
dividends declared on ordinary shares shall not be deducted in any case when determining the amount of BEPS.
Illustration: Share Splits
At the beginning of 2023, an entity had 100,000 outstanding ordinary shares. In addition, it reported the following
share transactions for the year:
04/01/2023 acquired 10,000 treasury shares
07/01/2023 issued 30,000 new shares for cash
08/31/2023 share split up of 2-for-1 was declared
11/30/2023 reissued 6,000 treasury shares
Date no. of share multiplier no. of shares until 12/31 time weight weighted average
01/01/23 100,000 2 200,000 12 12/12 200,000
04/01/23 (10,000) 2 (20,000) 9 9/12 (15,000)
07/01/23 30,000 2 60,000 6 6/12 30,000
11/30/23 6,000 6,000 1 1/12 500
Totals 246,000 215,500
Illustration: Share Dividends
On January 1, 2023, an entity reported 400,000 outstanding shares. For the year 2023, it reported the following
share transactions:
02/01/2023 36,000 shares were issued for cash
06/01/2023 30% share dividend were issued
07/31/2023 24,000 shares were acquired to be held in treasury
10/31/2023 60,000 shares were issued for cash
Date no. of share multiplier no. of shares until 12/31 time weight weighted average
01/01/23 400,000 130% 520,000 12 12/12 520,000
02/01/23 36,000 130% 46,800 11 11/12 42,900
07/31/23 (24,000) (24,000) 5 5/12 (10,000)
10/31/23 60,000 60,000 2 2/12 10,000
Totals 602,800 562,900
