Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 17
EARNINGS PER SHARE

CHAPTER STUDY OBJECTIVES

1. Understand why earnings per share (EPS) is an important number and how it should be
presented, disclosed and analyzed. Earnings per share numbers give common shareholders an idea
of the amount of earnings that can be attributed to each common share. This information is often
used to predict future cash flows from the shares and to value companies.
Under IFRS, EPS must be presented for all public companies or companies that are in the process of
going public. The calculations must be presented on the face of the income statement for net income
from continuing operations and net income (for both basic EPS and diluted EPS in the case of
complex capital structures). When there are discontinued operations, the per share impact of these
items must also be shown, but it can be shown either on the face of the income statement or in the
notes to the financial statements. Comparative calculations must also be shown.
EPS is one of the most commonly used metrics for assessing performance. Diluted EPS is especially
important because it allows for the effects of potential dilution. The price earnings ratio is often used
to value companies.

2. Calculate basic earnings per share. Basic earnings per share is an actual calculation that takes
income available to common shareholders and divides it by the weighted average number of common
shares outstanding during the period

3. Calculate diluted earnings per share. Diluted earnings per share is a “what if” calculation that
considers the impact of potential common shares. Potential common shares include convertible debt
and preferred shares, options and warrants, contingently issuable shares, and other instruments that
may result in additional common shares being issued by the company. They are relevant because they
may cause the present interests of the common shareholders to become diluted.
The if-converted method considers the impact of convertible securities such as convertible debt and
preferred shares. It assumes that the instruments are converted at the beginning of the year (or issue
date, if later) and that any related interest or dividend is thus avoided.
The treasury stock method looks at the impact of written call options on EPS numbers. It assumes
that the options are exercised at the beginning of the year and that the money from the exercise is
used to buy back shares in the open market at the average common share price.
The reverse treasury stock method looks at the impact of written put options. It assumes that the
options are exercised at the beginning of the year and that the company first issues shares in the
market (at the average share price) to obtain sufficient funds to buy the shares under the option.
Antidilutive potential common shares are irrelevant because they would result in diluted EPS
calculations that are higher than the basic EPS. Diluted EPS must show the worst possible EPS
number. Note that purchased options and written options that are not in the money are ignored for
purposes of calculating diluted EPS because they are either antidilutive or will not be exercised

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Use the three-step approach to calculate diluted EPS.

4. Identify the major differences in accounting between IFRS and ASPE, and what changes are
expected in the near future. ASPE does not prescribe accounting standards for EPS. The IASB was
working on a revised plan of action to study the issues for IFRS. At the time of writing, work on the
project was paused.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS

Answer No. Description

c 1. Objective of EPS
c 2. EPS presentation
b 3. Basic and diluted EPS
d 4. EPS disclosure
c 5. Complex capital structure
c 6. EPS analysis
a 7. EPS valuation
c 8. Simple capital structure
a 9. Calculating basic EPS
d 10. Weighted average number of common shares outstanding
c 11. Contingently issuable shares
a 12. IFRS nomenclature
d 13. Choose incorrect statement.
b 14. Effect of dividends on non-convertible preferred shares
d 15. EPS and capital structure
b 16. Calculate EPS.
c 17. Calculate basic EPS.
c 18. Calculate basic EPS.
b 19. Calculate weighted average number of common shares outstanding.
b 20. Calculate weighted average number of common shares outstanding
b 21. Calculate basic EPS.
c 22. Calculate basic EPS with non-convertible preferred shares.
b 23. Calculate basic EPS.
b 24. Calculate basic EPS.
a 25. Weighted average number of shares
b 26. Calculate denominator for basic and diluted EPS with convertible bonds.
b 27. Calculate denominator for basic and diluted EPS with convertible bonds.
a 28. Calculate denominator for basic and diluted EPS with convertible bonds.
c 29. Effect of treasury shares on EPS
d 30. Diluted EPS
b 31. Dilutive convertible securities
a 32. Cumulative convertible preferred shares effect on diluted EPS
d 33. Treasury stock method
a 34. Treasury stock method
b 35. Treasury stock method
d 36. Antidilutive securities
d 37. EPS calculation with two dilutive convertible securities
b 38. Reverse treasury stock method.
b 39. Choose correct statement.
a 40. "If-converted" method
c 41. Calculate basic EPS.
c 42. Diluted EPS
b 43. Calculate diluted EPS with convertible bonds

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer No. Description

b 44. Calculate diluted EPS with convertible bonds.
c 45. Calculate diluted EPS with convertible bonds.
b 46. Calculate diluted EPS with convertible bonds.
c 47. Calculate diluted EPS with convertible preferred shares.
c 48. Calculate diluted EPS with convertible bonds and convertible preferred
shares.
b 49. Calculate diluted EPS with convertible preferred shares.
b 50. Calculate diluted EPS with convertible bonds.
b 51. Calculate diluted EPS with convertible preferred shares and convertible
bonds.
d 52. Use of treasury stock method with outstanding warrants
a 53. Use of reverse treasury stock method with outstanding put options
b 54. Calculate denominator for diluted EPS with outstanding stock options.
b 55. Calculate denominator for diluted EPS with call options.
d 56. Calculate diluted EPS.
d 57. IFRS vs ASPE
b 58. Challenges for standard setters

EXERCISES

Item Description
E17-59 EPS calculations
E17-60 EPS presentation and disclosures under IFRS
E17-61 Weighted average number of common shares outstanding
E17-62 Weighted average number of common shares outstanding
E17-63 Basic and diluted earnings per share
E17-64 Basic and diluted earnings per share
E17-65 Issuance of stock dividends/splits versus issuance/repurchase of shares
E17-66 Effect of dilutive securities on diluted earnings per share calculations
E17-67 Diluted earnings per share – treasury method
E17-68 Diluted earnings per share – reverse treasury method
E17-69 Effects of antidilutive securities on EPS
E17-70 Multiple antidilutive financial instruments and EPS
E17-71 Multiple antidilutive financial instruments and EPS
E17-72 Company valuation using EPS
E17-73 Assessing performance using EPS

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS

Item Description
P17-74 Weighted average calculations and basic EPS
P17-75 Diluted earnings per share
P17-76 Basic and diluted earnings per share
P17-77 Basic and diluted earnings per share
P17-78 Basic and diluted earnings per share
P17-79 Basic and diluted earnings per share
P17-80 Basic and diluted earnings per share
P17-81 Weighted average calculations, basic and diluted earnings per share
P17-82 Weighted average calculations and basic earnings per share
P17-83 If-converted, treasury stock and reverse treasury stock methods

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS

1. EPS is important to common shareholders for all of the following reasons, except for
a) it indicates the amount of income that is earned by each common share.
b) common shareholders have a residual interest in the company.
c) it is an indicator of cumulative dividend payments.
d) it is an indicator of the effect of convertible debt.

Answer: c

Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed, and analyzed.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

2. EPS is normally
a) on the income statement of privately held and publicly traded corporations.
b) in the notes to the financial statements.
c) not a requirement under ASPE.
d) provided at the discretion of management.

Answer: c

Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed and analyzed.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

3. Diluted EPS is only required when

a) a company has discontinued operations.
b) there is a complex capital structure.
c) basic EPS can’t be calculated.
d) a company uses ASPE.

Answer: b

Difficulty: Easy

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed and analyzed.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

4. Standard setters require the EPS calculation to be included

a) only when there is a complex capital structure.
b) under both IFRS and ASPE.
c) when is an indicator of cumulative dividend payments.
d) for all publicly traded companies.

Answer: d

Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed and analyzed.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

5. Complex capital structures and a dual presentation of earnings require all of the following
additional disclosures, except
a) the amounts used in the numerator and denominator in calculating basic and diluted EPS.
b) a reconciliation of the numerators and denominators of basic and diluted per share calculations for
income before discontinued operations.
c) adjustments to income before discontinued operations.
d) securities that could dilute basic EPS in the future but were not included in the calculations due to
antidilutive features.

Answer: c

Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed, and analyzed.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

6. Standard setters are very specific regarding the calculation of EPS for all of the following reasons,

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

except
a) predictor of future company value.
b) it can be used to assess management stewardship.
c) the income tax consequences of increased share value.
d) because of the dilutive nature of complex financial instruments.

Answer: c

Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number and how is
should be presented, disclosed, and analyzed.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

7. All of the following regarding company valuation are true, except for
a) EPS is the preferred method recommended by standard setters.
b) sustainable cash flow or earnings can be used.
c) EPS can be used because it is considered reliable and all inclusive.
d) using EPS provides a very rough calculation only.

Answer: a

Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number and how is
should be presented, disclosed, and analyzed
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

8. With respect to the calculation of earnings per share, which of the following would constitute a
simple capital structure?
a) common shares and convertible bonds
b) earnings derived from one primary line of business
c) common shares and non-convertible preferred shares
d) common shares and convertible preferred shares

Answer: c

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting

Bloomcode: Knowledge
AACSB: Analytic

9. In calculating basic earnings per share, if the preferred shares are cumulative, the amount that
should be deducted as an adjustment to the numerator is the
a) annual preferred dividend.
b) preferred dividends in arrears.
c) annual preferred dividend times (one minus the income tax rate).
d) preferred dividends in arrears times (one minus the income tax rate).

Answer: a

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

10. In calculating the weighted average number of common shares outstanding, when a stock
dividend or stock split occurs, the additional shares are
a) ignored.
b) weighted by the number of months outstanding.
c) considered outstanding at the beginning of the year.
d) considered outstanding at the beginning of the earliest year reported.

Answer: d

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

11. When a corporation agrees to issue common shares if some specific future event occurs, such
shares are known as
a) potential treasury shares.
b) outstanding common shares.
c) contingently issuable shares.
d) convertible common shares.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

12. Under IFRS, common shares are also called

a) ordinary shares.
b) potential shares.
c) treasury shares.
d) non-dilutive shares.

Answer: a

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

13. Which of the following statements is NOT correct?

a) Options that are out of the money are ignored in earnings per share calculations.
b) The treasury stock method is used for written call options.
c) Corporations that have only antidilutive securities are not permitted to increase their earnings per
share and are required to report only basic earnings per share.
d) Contingently issuable shares are never included in diluted earnings per share calculations.

Answer: d

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

14. In calculating diluted earnings per share, dividends on non-convertible cumulative preferred
shares should be
a) ignored.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) deducted from net income whether declared or not.

c) deducted from net income only if declared.
d) added back to net income whether declared or not.

Answer: b

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

15. EPS calculated as income available to common shareholders divided by the weighted average
number of shares outstanding is used for a
a) complex capital structure.
b) hybrid capital structure.
c) complex capital structure with call options.
d) simple capital structure.

Answer: d

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

16. Which of the following is the formula to compute EPS?

a) (Net income – Preferred dividends) ÷ Average number of shares outstanding
b) (Net income – Preferred dividends) ÷ Weighted average number of shares outstanding
c) (Net income + Preferred dividends) ÷ Weighted average number of shares outstanding
d) Net income ÷ Number of shares outstanding

Answer: b

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

17. At January 1, 2023, Marvel Corp. had 200,000 common shares outstanding (no preferred shares
issued). On July 1, 2023, the corporation issued 225,000 shares, and reported net income of $315,000
for calendar 2023. Basic earnings per share for 2023 would be
a) $2.80.
b) $1.40.
c) $1.01.
d) $0.74.

Answer: c

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $315,000 ÷ [200,000 + (225,000 x 6 ÷ 12)] = $1.01

18. At December 31, 2023, Helium Corp. had 650,000 common shares authorized, 500,000 of which
were issued and outstanding throughout the year and 150,000 of which were issued on October 1,
2023. Net income for calendar 2023, was $382,500. There are no preferred shares issued. Basic
earnings per share for 2023 would be
a) $0.43.
b) $0.59.
c) $0.71.
d) $0.77.

Answer: c

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $382,500 ÷ [500,000 + (150,000 x 3 ÷ 12)] = $0.71

19. At January 1, 2023, Dango Ltd had 450,000 common shares outstanding (no preferred shares
issued). During 2023, Dango issued 60,000 shares on May 1, purchased 36,000 treasury shares on
September 1, and issued 42,000 more shares on November 1. The weighted average of common
shares outstanding for 2023 is
a) 497,000.
b) 485,000.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) 509,000.
d) 469,000.

Answer: b

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 450,000 + (60,000 × 8 ÷ 12) – (36,000 × 4 ÷ 12) + (42,000 × 2 ÷ 12) = 485,000

20. At January 1, 2023, Wrango Ltd had 450,000 common shares outstanding (no preferred shares
issued). During 2023, Wrango issued 60,000 shares on May 1, purchased 36,000 treasury shares on
September 1, issued 42,000 more shares on November 1, and issued a 2-for-1 stock split on Dec 31.
The weighted average of common shares outstanding for 2023 is
a) 994,000.
b) 970,000.
c) 1,018,000.
d) 938,000.

Answer: b

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 450,000 + (60,000 × 8 ÷ 12) – (36,000 × 4 ÷ 12) + (42,000 × 2 ÷ 12) = 485,000; 485,000 x 2 =
970,000.

21. During 2023, Neimer Ltd. had 350,000 common shares, 60,000 non-cumulative convertible
preferred shares, and $1,200,000 10% convertible bonds outstanding. The preferred shares are
convertible into 80,000 common shares. During 2023, Neimer paid dividends of $1.00 per share to the
common shares and $1.50 per share to the preferred shares. Each $1,000 bond is convertible into 50
common shares. The net income for 2023 was $1,000,000 and the income tax rate was 30%. Basic
earnings per share for 2023 is
a) $2.04.
b) $2.60.
c) $2.86.
d) $3.03.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: [$1,000,000 – (60,000 x $1.50)] ÷ 350,000 = $2.60

22. At December 31, 2022, Pliers Corp. had 380,000 common shares outstanding. No additional
common shares were issued during 2023. On January 1, 2023, Pliers issued 420,000 non-cumulative,
non-convertible preferred shares. During 2023, Pliers paid cash dividends of $200,000 to the common
shares and $160,000 to the preferred shares. Net income for calendar 2023, was $540,000. Their
income tax rate is 40%. Basic earnings per share for 2023 is
a) $0.42.
b) $1.84.
c) $1.00.
d) $1.42.

Answer: c

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($540,000 – $160,000) ÷ 380,000 = $1.00

23. At December 31, 2022, Grieger Corp. had 300,000 common shares outstanding. No common shares
were issued during 2023; however, on January 1, 2023, Grieger issued 160,000 non-cumulative, non-
convertible preferred shares. During 2023, Grieger paid cash dividends of $100,000 to the common
shareholders and $60,000 to the preferred shareholders. Net income for calendar 2023 was $450,000.
Basic earnings per share for 2023 would be
a) $0.20.
b) $1.30.
c) $1.50.
d) $1.70.

Answer: b

Difficulty: Medium

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Calculate basic earnings per share.

Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($450,000 – $60,000) / 300,000 = $1.30

24. At December 31, 2022 and 2023, Danish Corp. had 100,000 common shares and 10,000, $5, no par
value cumulative preferred shares outstanding. No dividends were declared in 2022 or 2023. Net
income for 2023 was $400,000. For 2023, basic earnings per share would be
a) $4.00.
b) $3.50.
c) $3.00.
d) $2.00.

Answer: b

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$400,000  (10,000 $5.00)
Feedback: 100,000 = $3.50

25. When calculating the weighted average number of shares outstanding for the year,
a) restatement of the weighted average number of shares outstanding is required before the stock
dividend or split.
b) restatement of the weighted average number of shares is required for stock dividends only.
c) restatement of the weighted average number of shares is required for stock splits only.
d) restatement of the weighted average number of shares is required after the stock dividend or split.

Answer: a

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

26. At December 31, 2022, Columbus Inc. had 3,000,000 common shares outstanding. An additional
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

500,000 common shares were issued on April 1, 2023, and 250,000 more on July 1, 2023. On October 1,
2023, Marion issued 12,500, $1,000 par value, 8% convertible bonds. Each bond is convertible into 20
common shares. No bonds were converted in 2023. What is the number of shares to be used in
calculating 2023 basic earnings per share and diluted earnings per share, respectively?
a) 3,500,000 and 3,500,000
b) 3,500,000 and 3,562,500
c) 3,500,000 and 3,750,000
d) 3,750,000 and 4,250,000

Answer: b

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 3,000,000 + (500,000 × 9 / 12) + (250,000 × 6 ÷ 12) = 3,500,000
3,500,000 + (12,500 × 20 × 3 ÷ 12) = 3,562,500

27. At December 31, 2022, Parrot Corp. had 1,000,000 common shares outstanding (no preferred
shares issued). An additional 100,000 shares were issued on April 1, 2023, and 240,000 more on
September 1. On October 1, Parrot issued $3,000,000 (par value) 9% convertible bonds. Each $1,000
bond is convertible into 40 common shares. No bonds have been converted yet. The number of shares
to be used in calculating basic earnings per share and diluted earnings per share for 2023 is
a) 1,155,000 and 1,155,000.
b) 1,155,000 and 1,185,000.
c) 1,155,000 and 1,275,000.
d) 1,540,000 and 1,660,000.

Answer: b

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 1,000,000 + (100,000 × 9 ÷ 12) + (240,000 × 4 ÷ 12) = 1,155,000
1,155,000 + $3,000,000 $1,000 40 3 ÷ 12 = 1,185,000

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

28. At December 31, 2022, St. John’s Limited had 4,000,000 common shares outstanding (no preferred
shares issued). An additional 250,000 common shares were issued on July 1, 2023, and 500,000 more
on October 1, 2023. As well, on April 1, 2023, St. John’s issued 10,000, $1,000 face value, 8%
convertible bonds. Each bond is convertible into 40 common shares. No bonds were converted in
2023. What is the number of shares to be used in calculating basic earnings per share and diluted
earnings per share, respectively, for 2023?
a) 4,250,000 and 4,550,000
b) 4,250,000 and 4,250,000
c) 4,250,000 and 4,650,000
d) 4,750,000 and 5,050,000

Answer: a

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 4,000,000 + (250,000 × 6 ÷ 12) + (500,000 × 3 ÷ 12) = 4,250,000
4,250,000 + (10,000 × 40 × 9 ÷ 12) = 4,550,000

29. What effect will the acquisition of treasury shares have on shareholders’ equity and basic earnings
per share, respectively?
Shareholders’ equity Basic EPS
a) decrease no effect
b) increase no effect
c) decrease increase
d) increase decrease

Answer: c

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

30. When calculating diluted earnings per share, convertible bonds are
a) ignored.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) assumed converted whether they are dilutive or antidilutive.

c) assumed converted only if they are antidilutive.
d) assumed converted only if they are dilutive.

Answer: d

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

31. Dilutive convertible securities must be used in the calculation of

a) basic earnings per share only.
b) diluted earnings per share only.
c) diluted and basic earnings per share.
d) Such securities are never included.

Answer: b

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

32. In calculating diluted earnings per share, the equivalent number of convertible preferred shares is
added as an adjustment to the denominator. If the preferred shares are cumulative, which amount
should then be added as an adjustment to the numerator?
a) annual preferred dividend
b) annual preferred dividend times (one minus the income tax rate)
c) annual preferred dividend times the income tax rate
d) annual preferred dividend divided by the income tax rate

Answer: a

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

33. In calculating diluted earnings per share, the treasury stock method is used for written call options
and equivalents to reflect assumed reacquisition of common shares at the average market price
during the period. If the exercise price of the options or warrants exceeds the average market price,
the calculation would
a) fairly present diluted earnings per share on a prospective basis.
b) fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
c) reflect the excess of the number of shares assumed issued over the number of shares assumed
reacquired as the potential dilution of earnings per share.
d) be antidilutive.

Answer: d

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

34. In applying the treasury stock method to determine the dilutive effect of options and warrants, the
proceeds assumed to be received upon exercise of the options and warrants
a) are used to calculate the number of common shares repurchased at the average market price, when
calculating diluted earnings per share.
b) are added, net of tax, to the numerator of the calculation for diluted earnings per share.
c) are disregarded in the calculation of earnings per share if the exercise price of the options and
warrants is less than the ending market price of common shares.
d) are not included in the calculation.

Answer: a

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

35. When applying the treasury stock method, the price of the common shares used for the assumed
repurchase is the
a) market price at the end of the year.
b) average market price during the year.
c) market price at the beginning of the year.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) market price at the time the options or warrants were granted.

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

36. Antidilutive securities

a) should be included in the calculation of diluted earnings per share but not basic earnings per share.
b) are those whose inclusion in earnings per share calculations would cause basic earnings per share
to exceed diluted earnings per share.
c) include call options and warrants whose exercise price is less than the average market price of
common shares.
d) should be ignored in all earnings per share calculations.

Answer: d

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

37. Assume a corporation has two potentially dilutive convertible securities outstanding. The one that
should be used first to calculate diluted earnings per share is the security with the
a) greater earnings adjustment.
b) greater earnings per share adjustment.
c) smaller earnings adjustment.
d) smaller earnings per share adjustment.

Answer: d

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

38. The reverse treasury stock method is used for

a) written call options.
b) written put options.
c) convertible preferred shares.
d) convertible bonds.

Answer: b

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

39. Which of the following statements is correct?

a) Options that are in the money are ignored in earnings per share calculations.
b) Options that are out of the money are ignored in earnings per share calculations.
c) Contingently issuable shares are never included in diluted earnings per share calculations.
d) The treasury stock method is used for written put options.

Answer: b

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

40. The if-converted method of calculating earnings per share data assumes conversion of convertible
securities as of the
a) beginning of the earliest period reported (or at time of issuance, if later).
b) beginning of the earliest period reported (regardless of time of issuance).
c) middle of the earliest period reported (regardless of time of issuance).
d) ending of the earliest period reported (regardless of time of issuance).

Answer: a

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application
AACSB: Analytic

41. Information concerning the capital structure of Shepherd Corporation follows

December 31,
2023 2022
Common shares outstanding 100,000 shares 100,000 shares
Convertible preferred shares outstanding 10,000 shares 10,000 shares
9% convertible bonds $2,000,000 $2,000,000
During 2023, Shepherd paid dividends of $1.00 per common share and $2.50 per preferred share. The
preferred shares are non-cumulative, and convertible into 20,000 common shares. The 9% convertible
bonds are convertible into 50,000 common shares. Net income for calendar 2023 was $500,000.
Assume the income tax rate is 30%. Basic earnings per share for 2023 is
a) $3.33.
b) $3.65.
c) $4.75.
d) $5.00.

Answer: c

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$500,000  (10,000 $2.50)
Feedback: 100,000 = $4.75

42. Crow Ltd. reported net income of $780,000 in 2023 and had 300,000 common shares outstanding
throughout the year. Also, outstanding all year were 60,000 (written) options to purchase common
shares at $11 per share. The average market price for the common shares during the year was $16 per
share. Calculate the diluted earnings per share (round to 2 decimal places).
a) $2.45
b) $2.60
c) $2.17
d) $2.89

Answer: c

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application
AACSB: Analytic
Feedback: $780,000 / (300,000+60,000) = $2.17

43. Owl Corp. earned net income of $560,000 in 2023 and had 100,000 common shares outstanding
throughout the year. Also outstanding all year was $400,000 of 10% bonds that are convertible into
22,000 common shares. Owl Corp.’s tax rate is 35%. What is Owl Corp.’s 2023 diluted earnings per
share?
a) $4.59
b) $4.80
c) $5.60
d) $5.86

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: = ($560,000 + ($400,000 x 10% x (1 – .35)) / (100,000 + 22,000) = $4.80

44. On January 2, 2023, Delila Inc. issued at par $10,000 6% bonds convertible into 1,000 of its
common shares. No bonds were converted during 2023. Throughout 2023, Delila had 1,000 common
shares outstanding (no preferred shares issued). Delila’s 2023 net income was $6,000, and its income
tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding
during 2023. Delila’s diluted earnings per share for 2023 would be
a) $3.00.
b) $3.21.
c) $3.30.
d) $6.42.

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$6,000  ($10,000 .06 .70)
Feedback: 1,000  1,000 = $3.21

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

45. At December 31, 2022, Felix Ltd. had 500,000 common shares outstanding (no preferred shares
issued). On October 1, 2023, an additional 100,000 common shares were issued. In addition, Felix had
$5,000,000, 6% convertible bonds outstanding at December 31, 2022, which are convertible into
225,000 common shares; however, no bonds were converted during 2023. Net income for calendar
2023 was $1,500,000. Assuming the income tax rate was 30%, the diluted earnings per share for 2023
would be
a) $3.26.
b) $2.40.
c) $2.28.
d) $2.00.

Answer: c

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$1,500,000  ($5,000,00 0 .06 .7)
 3 
500,000   100,000    225,000
Feedback:  12  = $2.28

46. On January 2, 2023, Helisinki Ltd. issued at par $300,000, 9% convertible bonds. Each $1,000 bond
is convertible into 30 shares. No bonds were converted during 2023. There were 50,000 common
shares outstanding during 2023 (no preferred shares issued). Helsinki’s 2023 net income was $160,000
and its income tax rate was 30%. Helsinki’s diluted earnings per share for 2023 is
a) $2.71.
b) $3.03.
c) $3.20.
d) $3.58.

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$160,000  ($300,000 .09 .7)
Feedback: 50,000  $300,000 $1,000 30  = $3.03

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

47. At December 31, 2022, Pinwheel Ltd. had 900,000 common shares outstanding. In addition, the
corporation had 350,000 non-cumulative preferred shares outstanding, which were convertible into
600,000 common shares. During 2023, Pinwheel paid cash dividends of $360,000 to the common
shares and $225,000 to the preferred shares. Net income for 2023 was $1,350,000 and the income tax
rate was 40%. Diluted earnings per share for 2023 is
a) $2.25.
b) $1.50.
c) $0.90.
d) $1.11.

Answer: c

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,350,000 ÷ (900,000 + 600,000) = $0.90

48. During 2023, Madrid Ltd. had 200,000 common shares, 30,000 non-cumulative convertible
preferred shares, and $1,500,000 10% convertible bonds outstanding. The preferred shares are
convertible into 40,000 common shares. During 2023, Madrid paid dividends of $1.20 per share to the
common shares and $2.00 per share to the preferred shares. Each $1,000 bond is convertible into 45
common shares. The net income for 2023 was $900,000 and the income tax rate was 30%. Diluted
earnings per share for 2023 is
a) $2.98.
b) $3.38.
c) $3.27.
d) $3.41.

Answer: c

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$900,000  ($1,500,00 0 .10 .7)
Feedback: 200,000  67,500  40,000 = $3.27

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

49. On December 31, 2022, Lingo. had 1,000,000 common shares outstanding. On January 1, 2023,
Lingo issued 250,000 non-cumulative preferred shares, which were convertible into 500,000 common
shares. During 2023, Lingo paid cash dividends of $450,000 to the common shares and $150,000 to the
preferred shares. Net income for calendar 2023, was $4,500,000. Assuming an income tax rate of 30%,
the diluted earnings per share for 2023 is
a) $0.33.
b) $3.00.
c) $2.57.
d) $4.50.

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $4,500,000 ÷ (1,000,000 + 500,000) = $3.00

50. At December 31, 2022, Jack Russell Ltd. had 900,000 common shares outstanding (no preferred
shares issued). On September 1, 2023, an additional 300,000 common shares were issued. In addition,
Jack Russell had $10,000,000 (par value) 6% convertible bonds outstanding at December 31, 2022,
which are convertible into 600,000 common shares. No bonds were converted in 2023. Net income for
calendar 2023 was $3,750,000. Assuming the income tax rate is 30%, the diluted earnings per share for
2023 is
a) $2.35.
b) $2.61.
c) $2.72.
d) $3.75.

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$3,750,000  ($10,000,000 .06 .7)
Feedback: 900,000  (300,000  ÷  = $2.61

51. Information concerning the capital structure of Shelmardine Corporation follows

December 31,

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

2023 2022
Common shares outstanding 100,000 shares 100,000 shares
Convertible preferred shares outstanding 10,000 shares 10,000 shares
9% convertible bonds $2,000,000 $2,000,000
During 2023, Shelmardine paid dividends of $1.00 per common share and $2.50 per preferred share.
The preferred shares are non-cumulative, and convertible into 20,000 common shares. The 9%
convertible bonds are convertible into 50,000 common shares. Net income for calendar 2023 was
$500,000. Assume the income tax rate is 30%.
What is the diluted earnings per share for 2023?
a) $4.00
b) $3.68
c) $3.54
d) $2.94

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$500,000  ($2,000,00 0 .09 .7)
Feedback: 100,000  50,000  20,000 = $3.68

52. Warrants exercisable at $20 each to obtain 50,000 common shares were outstanding during a
period when the average market price of the common shares was $25. Application of the treasury
stock method in calculating diluted earnings per share will increase the weighted average number of
outstanding shares by
a) 50,000.
b) 40,000.
c) 12,500.
d) 10,000.

Answer: d

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 50,000 × $20 ÷ $25 = 40,000
50,000 – 40,000 = 10,000

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

53. Put options exercisable at $20 each to sell 50,000 common shares were outstanding during a
period when the average market price of the common shares was $10. Application of the reverse
treasury stock method in calculating diluted earnings per share will increase the weighted average
number of outstanding shares by
a) 50,000.
b) 40,000.
c) 12,500.
d) 10,000.

Answer: a

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($20 x 50,000) / $10 = 100,000
100,000 – 50,000 = 50,000

54. At December 31, 2023, Spearmint Inc. had 300,000 common shares outstanding (no preferred
shares issued). In addition, the corporation had granted 90,000 stock options to certain executives,
and which gave them the right to purchase Spearmint’s shares at the option price of $37 per share.
None of these options have yet been exercised. The average market price of Spaniel’s common shares
during 2023 was $50. What is the number of shares that should be used in calculating diluted earnings
per share for 2023?
a) 300,000
b) 323,400
c) 331,622
d) 366,600

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 90,000 – (90,000 × $37 ÷ $50) = 23,400
300,000 + 23,400 = 323,400

55. At December 31, 2022, Skye Inc. had 500,000 common shares outstanding (no preferred shares

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

issued). On July 1, 2023, an additional 50,000 common shares were issued. Skye also had unexercised
call options to purchase 40,000 common shares at $15 per share outstanding throughout 2023. The
average market price of Skye’s common shares was $20 during 2023. The number of shares that
should be used in calculating diluted earnings per share for 2023 is
a) 525,000.
b) 535,000.
c) 560,000.
d) 565,000.

Answer: b

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 500,000 + (50,000 × 6 ÷ 12) + 40,000 – (40,000 × $15 ÷ $20) = 535,000

56. Throughout 2023, Moon Ltd. had 1,200,000 common shares outstanding. As well, the corporation
paid $300,000 in preferred dividends and reported net income of $5,100,000 for 2023. In connection
with the acquisition of a subsidiary company in June 2022, Moon is required to issue 50,000 additional
common shares on July 1, 2024, to the former owners of the subsidiary. Moon’s diluted earnings per
share for 2023 should be
a) $4.25.
b) $4.08.
c) $4.00.
d) $3.84.

Answer: d

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
$5,100,000  $300,000
Feedback: 1,200,000  50,000 = $3.84

57. The main difference between IFRS and ASPE as it relates to EPS calculations is
a) there is no difference.
b) diluted EPS applies only to IFRS, both use basic EPS.
c) only companies with complex financial structures must calculate EPS under IFRS.
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) there are no prescribed standards under ASPE.

Answer: d

Difficulty: Easy
Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what
changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

58. Major challenges for standard setters calculating EPS includes all of the following, except
a) complex financial instruments.
b) redeveloping standards under ASPE.
c) treatment of conversion features.
d) dilutive securities.

Answer: b

Difficulty: Easy
Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what
changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES

Ex. 17-59 EPS calculations

Answer the following:
a) Explain why EPS is only calculated on common shares.
b) How is EPS calculated?
c) What are the two formulas normally calculated only for common shares, and how and why are
they used?
d) Explain what constitutes a complex structure?

Solution 17-59
a) Common shares are entitled to the residual interest in net income, after preferred dividends are
deducted. That is why EPS is normally only calculated for common shares.

b) Earnings per share is calculated by dividing net income less preferred dividends by the weighted
average number of common shares outstanding.

c) Basic EPS – looks at the actual earnings and the actual number of common shares outstanding.
Earnings per share disclosures help investors by indicating the amount of income that is earned by
each share. It helps shareholders assess future dividend payouts and value of each share.

Diluted EPS – is a “what if” calculation that takes into account the possibility that financial
instruments such as convertible debt and options might have a negative impact on existing
shareholder returns; therefore, the shares value. It a corporation has a complex capital structure both
EPS and diluted EPS would be presented.

d) A complex capital structure exists when a corporation has convertible securities, options,
warrants, or other rights that, upon conversion or exercise, could dilute earnings per share.

Difficulty: Medium
Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed and analyzed.
Section Reference: Objective of EPS
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

Ex. 17-60 EPS presentation and disclosures under IFRS

When and how is EPS used? Are there any differences for EPS between IFRS and ASPE? If so, explain

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

these differences in detail.

Solution 17-60
EPS is required under IFRS only and is presented on the face of the income statement. This is due to
the importance of EPS information for companies whose shares are trading on the stock markets or
that are in the process of listing on a stock market. In Canada only publicly traded companies are
required use IFRS. Privately held companies can choose to whether or not they wish to prescribe to
IFRS. ASPE does not require EPS calculations or disclosures, mainly because these firms are closely
held and due to the cost – benefit considerations. The are no standards for calculating EPS under
ASPE at all.

As a result, IFRS requires the following:

 Earnings per share amounts must be shown for all periods presented.
 If there has been a stock dividend or stock split, all per share amounts of prior period earnings
should be restated using the new number of outstanding shares.
 If diluted EPS data are reported for at least one period, they should be reported for all periods
that are presented, even if they are the same basic EPS.
 When the results of operations of a prior period have been restated the corresponding EPS date
should also be restated. The restatement’s effect should then be disclosed in the year of the
restatements.

Difficulty: Medium
Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed and analyzed.
Section Reference: Objective of EPS
Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what
changes are expected in the near future.
Section Reference: Analysis and IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

Ex. 17-61 Weighted average number of common shares outstanding

At January 1, 2023, Elan Corporation had 300,000 common shares outstanding (no preferred issued).
On March 1, the corporation issued 45,000 new shares to raise additional capital. On July 1, the
corporation declared and issued a 2 for 1 stock split. On October 1, the corporation purchased on the
open market 180,000 of its own shares at $35 each and retired them.

Instructions
Calculate the weighted average number of common shares outstanding to be used in calculating
earnings per share for 2023.

Solution 17-61
Increase Shares Portion of year Stock
(Decrease) Outstanding Outstanding Split

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Jan 1 300,000 2/12 x2 100,000

Mar 1 45,000 345,000 4/12 x2 230,000
Jul 1 345,000 690,000 3/12 172,500
Oct 1 (180,000) 510,000 3/12 127,500
Weighted average of common shares 630,000

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 17-62 Weighted average number of common shares outstanding

At January 1, 2023, Silverline Ltd. had 300,000 common shares outstanding (no preferred issued). On
March 1, the corporation issued 45,000 new shares to raise additional capital. On July 1, the
corporation declared and issued a 10% stock dividend. On October 1, the corporation purchased on
the open market 18,000 of its own shares at $35 each and retired them.

Instructions
Calculate the weighted average number of common shares outstanding to be used in calculating
earnings per share for 2023.

Solution 17-62
Increase Shares Portion of year Stock
(Decrease) Outstanding Outstanding Dividend
Jan 1 300,000 2/12 x 1.1 55,000
Mar 1 45,000 345,000 4/12 x 1.1 126,500
Jul 1 34,500 379,500 3/12 94,875
Oct 1 (18,000) 361,500 3/12 90,375
Weighted average of common shares 366,750

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 17-63 Basic and diluted earnings per share

Throughout the calendar year 2023, Kali Corporation has 400,000 common shares outstanding (no
preferred shares issued). In addition, Kali has 5,000, 20-year, 7% bonds outstanding, issued at par in
2021. Each $1,000 bond is convertible into 20 common shares after June 30, 2024. Kali reported net
income of $600,000 for calendar 2023. Its income tax rate is 30%.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions
Calculate the following for 2023:
a) Basic earnings per share
b) Diluted earnings per share
c) CRITICAL THINKING: The CEO of Kali has asked you to explain why a company would want to
calculate diluted EPS (DEPS). Explain the importance of DEPS and when it is used.

Solution 17-63
Net income $600,000

a) Basic earnings per share: Outstanding shares 400,000 = $1.50

b) Incremental effect of conversion of bonds

Bond interest after taxes $245,000

Assumed incrementa l shares 100,000 = $2.45

The conversion of the bonds would be antidilutive, since the incremental effect of $2.45 is greater
than the basic EPS of $1.50. No diluted EPS calculation is required. The basic and diluted earnings per
share of $1.50 should be reported.

c) CRITICAL THINKING: The diluted EPS calculation is especially useful because there are many
potential common shares outstanding through convertible securities, options, and warrants, and
other financial instruments, and shareholders need to understand how these instruments can affect
their holdings. From an economic perspective, it is therefore important to carefully analyze the
potential dilutive impact of the various securities instruments, and the IASB is helping make it
possible to do such analyses by continually striving to ensure greater transparency in EPS
calculations.

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 17-64 Basic and diluted earnings per share

Barker Inc. reported net income (30% tax rate) of $1,600,000 for calendar 2023, and an average of
500,000 common shares outstanding during the year. Barker issued $2,000,000 par value, 10-year, 9%
convertible bonds on January 1, 2022 at a $18,000 discount. The bonds are convertible into 60,000
common shares. Barker uses the straight-line method for amortizing the bond discount.

Instructions

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Calculate the following for 2023:

a) Basic earnings per share
b) Diluted earnings per share
c) CRITICAL THINKING: As the controller you have been approached by a junior accountant that
has recently been hired by Barker. The junior accountant is having difficulty understanding
between simple and complex financial structures and is unsure which structure applies to Barker.
Explain the difference between the structures and identify which applies to Barker.

Solution 17-64
a) Basic earnings per share
($1,600,000 ÷ 500,000 shares) = $3.20

b) Diluted earnings per share

$1,600,000 +.7($180,000 + $1,800)
————————————————— = $3.08
500,000 + 60,000

c) CRITICAL THINKING: When a corporation’s capital structure consists only of common shares and
preferred shares and/or debt without conversion rights, the company is said to have a simple capital
structure. In contrast, a company is said to have a complex capital structure if the structure includes
securities that could have a dilutive or negative effect (that is, a lowering effect) on earnings per
common share. Given this, Barker has a complex capital structure.

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 17-65 Issuance of stock dividends/splits versus issuance/repurchase of shares

Why does the issuance of a stock dividend or stock split require a restatement (which is applied
retroactively), but the issuance or repurchase of shares for cash does not?

Solution 17-65
Stock splits and stock dividends do not increase or decrease the net enterprise’s assets; only
additional shares are issued. Therefore, the weighted average number of shares must be restated. By
restating the number, valid comparisons of earnings per share can be made between periods before
and after the stock split or stock dividend. Conversely, the issuance or purchase of shares for cash
changes the amount of net assets. The company earns either more or less in the future as a result of
this change in net assets. Stated another way, a stock dividend or split does not change the
shareholders’ total investment; it only increases (or decreases if it is a reverse stock split) the number
of common shares.
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication

Ex. 17-66 Effect of dilutive securities on diluted earnings per share calculations
A publicly accountable enterprise is planning on issuing the following two securities in the coming
year
1. Convertible debt where mandatory conversion will take place five years after issue.
2. Debt with detachable warrants. The warrants can be exercised if profits exceed $1,000,000 in the
next five years.

Instructions
Discuss how these two securities will affect the diluted earnings per share calculation.

Solution 17-66
1. The convertible debt is an example of an instrument that is mandatorily convertible. As a result, it
is assumed the conversion has already taken place for calculating diluted earnings per share. The
common shares should be treated as if they were outstanding and included in the weighted
average of common shares calculation.

2. The second instrument is an example of contingently issuable shares, contingent on profits

exceeding $1,000,000 for the shares to be issued. If this condition is already met, then the shares
must be treated as if they are issued. However, if the condition has not been met, then these
shares should not be included in the diluted EPS calculation until the condition has been met.

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic

Ex. 17-67 Diluted earnings per share – treasury method

During 2023, Basenji Corp. had 300,000 common shares outstanding. In addition, at December 31,
2023, 50,000 shares were issuable upon exercise of executive stock options, which require a $40 cash
payment upon exercise (options were granted in 2021). The average market price of the common
shares during 2023 was $50.

Instructions

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Calculate the number of shares to be used in determining diluted earnings per share for 2023.

Solution 17-67
Shares outstanding (given).................................................................... 300,000
Add: Assumed issuance of stock options.............................................. 50,000
350,000
Deduct: Proceeds/Average market price ($2,000,000 ÷ $50)................ (40,000)
Number of shares to use for diluted EPS............................................... 310,000

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 17-68 Diluted earnings per share – reverse treasury method

During 2023, Jaguar Corp. had 300,000 common shares outstanding. At December 31, 2023, the
company had 50,000 put options outstanding that it had written. The exercise price on these options
is $40. The average market price of the common shares during 2023 was $35.

Instructions
Calculate the number of shares to be used in determining diluted earnings per share for 2023.

Solution 17-68
Shares outstanding (given).................................................................... 300,000
Add: Assumed issuance of stock options to cover the exercise
of the put order ($40 x 50,000) = $2,000,000; ($2,000,000 / $35)........... 57,143
357,143
Deduct: Shares received on the execution of the put are retired......... (50,000)
Number of shares to use for diluted EPS............................................... 307,143

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 17-69 Effects of antidilutive securities on EPS

What are antidilutive securities and how do they affect EPS?

Solution17-69
Antidilutive securities are securities that, upon conversion or exercise, would increase earnings per

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

share (or reduce the loss per share). The purpose of presenting both EPS numbers is to inform
financial statement users of situations that may occur and to provide worst-case dilutive situations. If
the securities are antidilutive, the likelihood of conversion or exercise is considered remote. Thus,
companies that have only antidilutive securities report only the basic EPS number.

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication

Ex. 17-70 Multiple antidilutive financial instruments and EPS

Explain the three steps that should be completed to calculate diluted EPS when there are multiple
potentially dilutive financial instruments.

Solution 17-70
Where there are multiple potentially dilutive financial instruments, the following three steps should
be completed:
1. Determine, for each dilutive security, the incremental per share effect if the security is exercised
or converted.
2. Where there are multiple dilutive securities, rank the results from the lowest earnings effect per
share to the largest; that is, rank the results from the most dilutive to least dilutive. The
instruments with the lowest incremental EPS calculation will drag the EPS number down the
most and are therefore most dilutive.
3. Beginning with the basic earnings per share based upon the weighted average number of
common shares outstanding, recalculate the earnings per share by adding the most dilutive per
share effects from the first step. If the results from this recalculation are less than EPS in the prior
step, go to the next most dilutive per share effect and recalculate the earnings per share. This
process is continued as long as each recalculated earnings per share amount is smaller than the
previous amount. The process will end either because there are no more securities to test or
because a particular security maintains or increases the earnings per share (that is, it is
antidilutive).

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication

Ex. 17-71 Multiple antidilutive financial instruments and EPS

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bluewave Telecom Inc. has a complex capital structure and reports both basic and diluted earnings
per share on its financial statements. After reviewing the securities, and in order to understand which
are dilutive and which are antidilutive, the following securities have been identified along with the
incremental per share effect:
Convertible Bond A – $2.25
Convertible Bond B – $1.82
Convertible Preferred Shares – $1.25
Stock Options – “In the money”

Instructions
If the Basic Earnings Per Share is calculated at $2.75, rank the securities in the order that they should
be applied to calculate Diluted Earnings Per Share.

Solution 17-71
Start with most dilutive to least dilutive.
1. Stock Options
2. Convertible Preferred Shares
3. Convertible Bond B
4. Convertible Bond A

Difficulty: Medium
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Communication
CPA: Financial Reporting
Bloomcode: Application
AACSB: Communication

Ex. 17-72 Company valuation using EPS

When and how might EPS be used for company valuation?

Solution 17-72 Company Valuation using EPS

Typically, a normalized or sustainable cash flow or earnings number should be used in the valuation
calculation because earnings of new income may be of higher or lower quality. However, since this
requires significant judgement when valuing common shares, the EPS number is sometimes used
instead because it is believed to be more reliable and all inclusive. PE ratio divides the price of the
share by EPS and result is called a multiplier. The multiplier shows the per share value that each dollar
of earnings generates. This is a rough calculation only and must be used with caution.

Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed and analyzed.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Comprehension

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Ex. 17-73 Assessing performance using EPS

How can EPS be used to assess performance and what challenges arise with this measurement?

Solution 17-73
EPS can be used to assess management stewardship and predict future value. Therefore, IFRS is very
specific regarding its calculation. From an economic perspective, it is very important to carefully
analyze the potential dilutive impact of various securities instruments. This can be quite difficult due
to the complexity of financial instruments that are very complex and difficult to break down. IASB is
continually striving to create greater transparency in EPS calculations.

Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number and how it
should be presented, disclosed and analyzed.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS

Pr. 17-74 Weighted average calculations and basic EPS

Harley Corp. has been operating successfully for the past fifteen years. However, during recent years,
its common shares outstanding changed as shown below. The corporation uses the calendar year as
its fiscal year.
2023 2022 2021
Shares outstanding, Jan 1 ............................ 300,000 240,000 200,000
Shares sold, Apr 2021.................................... 40,000
25% stock dividend, Jul 1, 2022.................... 60,000
2-for-1 stock split, Jul 1, 2023 ...................... 300,000
Shares sold, Oct 1, 2023................................ 100,000
Shares outstanding, Dec 31.......................... 700,000 300,000 240,000
Net Income.................................................... $750,000 660,000 598,000

Instructions
a) Calculate the weighted average number of shares outstanding for each year.
b) Assuming there were no preferred shares outstanding, calculate EPS for each year based on your
calculations in part a.

Solution 17-74
a) 2021: (200,000 x 3 ÷ 12) + (240,000 x 9 ÷ 12) = 230,000

2022: (300,000 x 12 ÷ 12) = 300,000

Stock dividend is weighted back to the beginning of the period.
Alternate calculation: (240,000 x 1.25 x 6 ÷ 12) + (300,000 x 6 ÷ 12)

2023: (300,000 x 2 x 9 ÷ 12) + (700,000 x 3 ÷ 12) = 625,000

b) 2023 2022 2021

Net income.................................................... $750,000 $660,000 $598,000
Average shares outstanding (including
stock dividend and stock split)..................... 625,000 300,000 230,000
Earnings per share......................................... $1.20 $2.20 $2.60

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 17-75 Diluted earnings per share

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

On January 1, 2023, Barley Corp. had 200,000 common shares outstanding. On April 1, 2023, 20,000
common shares were issued and on September 1, 2023, Bernard bought back 30,000 treasury shares.
The market price of the common shares averaged $50 during 2023. The corporation’s income tax rate
is 40%.

During 2023, there were 30,000 call options to buy common shares at $40 a share outstanding; and
there were 20,000, $7, no par value, cumulative and convertible preferred shares outstanding. Each
preferred share is convertible into three common shares.

During 2022, the corporation had issued $2,000,000 of 8% convertible bonds at face value. Each $1,000
bond is convertible into 20 common shares.

The corporation reported $750,000 net income for calendar 2023.

Instructions
Calculate diluted earnings per share for 2023. Complete the schedule below and show all calculations.

Net Adjust Adjusted Adjust Adjusted

Security Income -ment Net Income Shares -ment Shares EPS

Solution 17-75
Net Adjust Adjusted Adjust Adjusted
Security Income -ment Net Income Shares -ment Shares EPS
Com. Shares $750,000 $(140,000) $610,000 200,000 5,000a 205,000 $2.98
Options 610,000 205,000 6,000b 211,000 2.89
Preferred 610,000 140,000 750,000 211,000 60,000 271,000 2.77
Bonds 750,000 96,000c 846,000 271,000 40,000 311,000 2.72

a
20,000 × 3 ÷ 4 = 15,000
30,000 × 1 ÷ 3 = (10,000)
5,000 SA

b
30,000
$1,200,000 ÷ $50 = (24,000) (or) [(50 – 40) ÷ 50] × 30,000 = 6,000 SA
6,000 SA

$96,000 $140,000
c
$2,000,000 ×.08 ×.6 = $96,000; 40,000 = $2.40; 60,000 = $2.33

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Pr. 17-76 Basic and diluted earnings per share

Bloodhound Corp. provides the following data for calendar 2023
Net Income................................................................................... $2,400,000
Transactions in Common Shares Change Cumulative
Jan 1 beginning.......................................... 1,000,000
Mar 1 purchase of treasury shares............. (60,000) 940,000
Jun 1 shares split 2 for 1............................. 940,000 1,880,000
Nov 1 issuance of new shares..................... 120,000 2,000,000

8% Cumulative Convertible Preferred Shares (no par)

Convertible into 200,000 common shares
adjusted for split on June 1.................................................. $1,000,000

Stock Options
Exercisable at the option price of $25 per share.
Average market price in 2023 was $30 (market price
and option price adjusted for split)........................................ 60,000 shares

Instructions
a) Calculate basic earnings per share for 2023.
b) Calculate diluted earnings per share for 2023.

Solution 17-76
Calculation of weighted average shares outstanding during the year:
Jan 1- Feb 28 1,000,000 x 2 / 12 x 2= 333 333
Mar 1- May 31 940,000 x 3 / 12 x 2= 470,000
Jun 1- Oct 31 1,880,000 x 5 / 12= 783,333
Nov 1- Dec 31 2,000,000 x 2 / 12= 333,333
1,920,000

Additional shares for purposes of diluted earnings per share

Potentially dilutive securities
8% convertible preferred shares.............................................................. 200,000
Stock options
Proceeds from exercise of 60,000 options (60,000 × $25)................ $1,500,000
Shares issued upon exercise of options........................................... 60,000
Less: treasury shares purchasable with proceeds
($1,500,000 ÷ $30).............................................................................. 50,000 10,000
Dilutive securities—additional shares...................................................... 210,000

$2,400,000  $80,000
a) Basic earnings per share: 1,920,000 = $1.21
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

$2,400,000
b) Diluted earnings per share: 1,920,000  210,000 = $1.13

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 17-77 Basic and diluted earnings per share

Aria Ltd. provides the following information for calendar 2023:
1. Net income..................................................................................................................... $420,000
2. Capital Structure
a) $8 preferred shares, no par value, cumulative,........................................................ $600,000
6,000 shares outstanding
No dividends were declared during 2023.
b) Common shares, 76,000 shares outstanding on January 1.
On April 1, 40,000 shares were issued for cash.
On October 1, 16,000 shares were purchased and retired................................... $1,000,000
c) On January 2, 2022, Aria purchased Apso Corporation.
One of the terms of the purchase was that if Aria’s net income for 2022 or subsequent
years is $400,000 or more, 50,000 additional common shares would be issued to Apso
shareholders.

Instructions
Calculate basic and diluted earnings per share for 2023.

Solution 17-77
Net income........................................................................................................ $420,000
*Less preferred dividends ($6,000 x $8)........................................................... (48,000)
Income available to common (numerator)..................................................... $372,000
* Since they are cumulative, PFD dividends are deducted from NI.
The fact dividends were not declared is irrelevant.

Share Changes
Jan. 1.......................................................................................................... 76,000
Apr. 1, issuance 40,000.............................................................................. 40,000
116,000
Oct. 1, retirement 16,000.......................................................................... (16,000)
Ending Balance................................................................................................. 100,000

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Weighted average shares outstanding

Jan 1- Mar 31 76,000 x 3 / 12= 19,000
Apr 1- Sep 30 116,000 x 6 / 12= 58,000
Oct 1- Dec31 100,000 x 3 / 12= 25,000
102,000

Basic earnings per share: $372,000 ÷ 102,000 = $3.65

Diluted earnings per share: $372,000 ÷ (102,000 + 50,000) = $2.45

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 17-78 Basic and diluted earnings per share

Chamaa Ltd. provides the following information for 2023
1. Net income..................................................................................................................... $560,000
2. Capital structure
a) Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible
into 50 common shares for the next 10 years....................................................... 300,000
b) Common shares, 200,000 shares issued and outstanding during the
entire year.............................................................................................................. 2,000,000
c) Stock options outstanding to buy 16,000 common shares at $20 per share.
3. Other information
a) Bonds converted during 2023................................................................................... None
b) Income tax rate.......................................................................................................... 30%
c) Convertible debt was outstanding the entire year
d) Average market price per common share during 2023............................................ $32
e) Stock options were outstanding the entire year
f) Stock options exercised during 2023......................................................................... None

Instructions
Calculate basic and diluted earnings per share for 2023.

Solution 17-78
Basic EPS = $560,000 ÷ 200,000 = $2.80

Net Adjust Adjusted Adjust Adjusted Diluted

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Security Income -ment Net Income Shares -ment Shares EPS

Com. Shares $560,000 — $560,000 200,000 — 200,000 $2.80
Options 560,000 — 560,000 200,000 6,000a 206,000 2.72
Conv. Bonds 560,000 $12,600b 572,600 206,000 15,000 221,000 2.59

a
16,000
320,000
32 = (10,000)
6,000 SA

$12,600
b
$300,000 ×.06 ×.7 = $12,600; 15,000 = $.84

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 17-79 Basic and diluted earnings per share

Arlt Inc., a publicly accountable corporation, has a July 31 year end. For the 2022 fiscal year, there
were 100,000 common shares outstanding all year. Net income for the year ended July 31, 2023 was
$950,000. Its income tax rate is 30%.

Part A During the 2022 fiscal year, Arlt issued at par a 5% convertible bond, face value $5,000,000. Each
$1,000 bond is convertible into 20 common shares. No bonds were converted in 2022, however, on
March 31, 2023, 50% of the bonds were converted into common shares.

Part B On August 1, 2022, Arlt issued 100,000, $2, cumulative, convertible preferred shares. Two
preferred shares are convertible into one common share. On September 30, 2022, 20% of these
preferred shares were converted to common shares. The preferred share dividend was declared and
paid on June 15, 2023.

Instructions
Treating each part independently, calculate basic and diluted earnings per share for fiscal 2023.

Solution 17-79
Part A
Weighted average common shares and basic EPS

Date # shares Fraction of year

Aug 1, 2022 100,000 8/12 66,667

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Mar 31, 2023 150,000 4/12 50,000

Total 116,667

Basic EPS = $950,000 ÷ 116,667 = $8.14

For 5% convertible bonds:

Maturity value................................................ $5,000,000
Stated rate x.................................................. 5%
Interest expense............................................ 250,000
1 – tax rate (30%)........................................... X .70
After-tax interest............................................ 175,000
Less amount saved from 50% conversion.... 29,1671
Numerator effect........................................... $ 145,833

1
(5,000,000 x 50% x .05 x 4 / 12 x .7)

$5,000,000 / $1,000 = 5,000 bonds

Increase in diluted earnings per share denominator:........................ 5,000
.............................................................................................................. X 20
.............................................................................................................. 100,000

Less number on conversion 16,667 (100,000 shares X 50% X 4/12)... 16,667

Denominator effect.............................................................................. 83,333
Individual EPS calculation: $145,833 / 83,333 = $1.75 < $8.14

Therefore, potentially dilutive

Recalculate EPS
Income available to
common shareholders WACS
Basic EPS...................................................................................... $950,000 116,667
5% convertible bond.................................................................... 145,833 83,333
Total.............................................................................................. 1,095,833 200,000
Therefore, diluted EPS is $1,095,833 ÷ 200,000 = $5.48

Part B
Weighted average common shares and basic EPS

Date # shares Fraction of year WACS

Aug. 1, 2022 100,000 2 ÷ 12 16,667
Sept. 30, 2022 110,000 10 ÷ 12 91,667
Total 108,334

Basic EPS = ($950,000 – ($2 x 80,000)) ÷ 108,334 = $7.29

Diluted EPS Calculation

Effect of conversion rights

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Preferred share dividend for year avoided................................................................ $160,000

Number of common shares issued assuming
conversion on Aug 1 (100,000 ÷ 2).............................................................................. 50,000
Less: Portion actually converted on Sep 30/19.......................................................... (10,000)
Incremental effect of conversion option.................................................................... 40,000
Per share effect = 160,000 ÷ 40,000............................................................................. 4.00

Therefore, potentially dilutive

Recalculate EPS
Income available to
common shareholders WACS
Basic EPS...................................................................................... $790,000 108,334
Convertible preferred shares....................................................... 160,000 40,000
Total.............................................................................................. 950,000 148,334
Therefore, diluted EPS is $950,000 ÷ 148,334 = $6.40

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 17-80 Basic and diluted earnings per share

The following data are presented by Quentin Corp. for calendar 2023:
Net income............................................................................................................................. $4,500,000
Common shares outstanding, 1,000,000 shares
10%, cumulative preferred shares, convertible into 120,000 common shares........... $1,600,000
8% convertible bonds; convertible into 105,000 common shares...................................... $7,500,000
360,000 call options exercisable at $25 per share

Additional information
1. The common and preferred shares and the convertible bonds were outstanding from the
beginning of the year.
2. In 2023, a $500,000 dividend was declared and distributed; however, no dividends were declared
in 2022.
3. The average market price of the common shares in 2023 was $30. The stock price was $27 on
January 1, 2023, and $35 on December 31, 2023.
4. The convertible bonds were sold at par.
5. The income tax rate for 2023 is 30%.

Instructions
a) Calculate basic EPS.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) Calculate diluted EPS.

c) Briefly discuss the usefulness of the EPS measure in general. What is the additional importance of
reporting diluted EPS?

Solution 17-80
a) Basic EPS = (4,500,000 – 160,000) ÷ 1,000,000 = $4.34

b)
Denominator Numerator EPS
Start 1,000,000 $4,340,000 $4.34
Options 60,000* 0
EPS after step 1 1,060,000 4,340,000 4.09
Convertible preferred shares 120,000 160,000 1.33
EPS after step 2 1,180,000 4,500,000 3.81
Convertible bonds 105,000 420,000** 4.00
1,285,000 $4,920,000 3.83 antidilutive!

* 360,000 – (25 ÷ 30 × 360,000) = 60,000

** ($7,500,000 ×.08) × (1 –.30) = 420,000

Since the bonds are antidilutive, they are not included in the calculation, and diluted EPS = $4,500,000
÷ 1,180,000 = $3.81

c) EPS in general provides investors with the information on how much of the earnings each common
share earned in the current year. This informs investors how much of the firm’s earnings they “own”
and will help them in predicting future dividend payouts. Diluted EPS provides shareholders with a
more realistic picture of the future EPS as it also considers complex financial instruments that are not
common shares yet, but are likely to be converted into common shares, which will lower the current
shareholder’s share of the earnings. Diluted EPS can also be viewed as a “worst case” scenario for the
current shareholders.

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.
Section Reference: Basic EPS
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 17-81 Weighted average calculations, basic and diluted earnings per share
Drako Corp. had the following activity related to its common shares for the year ending December 31,
2023:
Shares outstanding, Jan 1............................ 150,000
10% stock dividend, Apr 1............................. 15,000

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Shares issued, Jul 1....................................... 20,000

Shares repurchased, Oct 1............................ (50,000)
Shares issued, Dec 31*.................................. 10,000
Ending balance, Dec 31................................. 145,000
Net Income.................................................... $476,000

Additional information:
 Drako issued 3,000, $2, cumulative preferred shares for $300,000, however, dividends were not
declared during 2023.
 During 2023, Drako had 15,000 stock options outstanding that were “in the money”. The exercise
price of the options is $20, while the market price was $25.

Instructions
a) Calculate the weighted average number of shares.
b) Calculate basic EPS.
c) Calculate full diluted EPS.

Solution 17-81
a) Weighted average number of shares:

(150,000 x 1.1 x 6 ÷ 12) + (185,000 x 3 ÷ 12) + - (135,000 x 3 ÷ 12) = 162,500

*Shares sold on December 31, 2023 are ignored because they have not been outstanding during the
year

b) Basic EPS**: ($476,000 – (3,000 x $2)) ÷ 162,500 = $2.89

c) Fully Diluted EPS:

Stock option dilutive effect:
Company receipt of cash on exercise (15,000 x $20).......................... $300,000
Shares issued to satisfy the stock options.......................................... 15,000
Cash proceeds used to buy back shares for retirement
($300,000 / $25).................................................................................... (12,000)
Incremental shares.............................................................................. 3,000
New average weighted common shares (162,500 + 3,000)................ 165,500

Diluted EPS ($476,000 – (3,000 x $2)) ÷ 165,500 = $2.84

** Since the preferred shares are cumulative, preferred dividends are deducted from net income. The
fact dividends were not declared is irrelevant.

Difficulty: Medium
Learning Objective: Calculate basic earnings per share.

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Basic EPS

Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 17-82 Weighted average calculations and basic earnings per share
Mangey Corp. had the following activity related to its common shares for the year ending December
31, 2023:
Shares outstanding, Jan 1............................ 150,000
2-for-1 stock split, Apr 1................................ 150,000
Shares issued, Jul 1....................................... 20,000
Shares repurchased, Oct 1............................ (50,000)
Shares issued, Dec 31*.................................. 10,000
Ending balance, Dec 31................................. 280,000
Net Income.................................................... $476,000

In addition, the company issued 3,000, $2, cumulative preferred shares for $300,000, however,
dividends were not declared during 2023.

Instructions
a) Calculate the weighted average number of shares.
b) Calculate basic EPS.
c) CRITICAL THINKING: If dividends were declared, would the answer to part b) change? Explain why
or why not.

Solution 17-82
a) Weighted average number of shares:

(150,000 x 2 x 6 ÷ 12) + (320,000 x 3 ÷ 12) + (270,000 x 3 ÷ 12) = 297,500

*Shares sold on December 31, 2023 are ignored because they have not been outstanding during the
year

b) Basic EPS:** ($476,000 – (3,000 x $2)) ÷ 297,500 = $1.58

** Since the preferred shares are cumulative, preferred dividends are deducted from net income. The
fact dividends were not declared is irrelevant.

c) No, the answer would not change. Since the preferred shares are cumulative, the preferred
dividend is incorporated into the calculation, regardless of whether the dividend is declared or not.

Difficulty: Medium
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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Calculate basic earnings per share.

Section Reference: Basic EPS
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Pr. 17-83 If-converted, treasury stock and reverse treasury stock methods
Explain the if-converted, treasury stock and reverse treasury stock methods that are used to consider
the impact of potential common shares on diluted earnings per share.

Solution 17-83
The if-converted method considers the impact of convertible securities such as convertible debt and
convertible preferred shares. It assumes that the instruments are converted at the beginning of the
year (or issue date, if later) and that any related interest or dividend is thus avoided.

The treasury stock method looks at the impact of written call options on EPS numbers. It assumes
that the options are exercised at the beginning of the year and that the money from the exercise is
used to buy back shares in the open market at the average common share price.

The reverse treasury stock method looks at the impact of written put options. It assumes that the
options are exercised at the beginning of the year and that the company first issues shares in the
market (at the average share price) to obtain sufficient funds to buy the shares under the option.

Difficulty: Easy
Learning Objective: Calculate diluted earnings per share.
Section Reference: Diluted EPS
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

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