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Chapter 37
Earnings Per Share

NAME: Lovers Mae B. Basergo Date:

Professor: Gwendolyn Hollanes Section: Score:

QUIZ:

1. What is the correct treatment of a stock dividend issued in mid-year when computing the
weighted-average number of common shares outstanding for earnings per share purposes?
a. The stock dividend should be weighted by the length of time that the additional number of
shares are outstanding during the period.
b. The stock dividend should be included in the weighted-average number of common shares
outstanding only if the additional shares result in a decrease of 3 percent or more in earnings
per share.
c. The stock dividend should be weighted as if the additional shares were issued at the
beginning of the year.
d. The stock dividend should be ignored since no additional capital was received.

2. The EPS computation that is forward-looking and based on assumptions about future
transactions is
a. diluted EPS.
b. basic EPS.
c. continuing operations EPS.
d. extraordinary EPS.

3. When computing diluted earnings per share, stock options are

a. recognized only if they are dilutive.
b. recognized only if they are antidilutive.
c. recognized only if they were exercised.
d. ignored.

4. Of the following, select the incorrect statement concerning earnings per share.
a. During periods when all income is paid out as dividends, earnings per share and dividends
per share under a simple capital structure would be identical.
b. Under a simple capital structure, no adjustment to shares outstanding is necessary for a
stock split on the last day of the fiscal period.
c. During a period, changes in stock issued or reacquired by a company may affect earnings
per share.
d. During a loss period, the amount of loss attributed to each share of common stock should be
computed.

5. In applying the treasury stock method of computing diluted earnings per share, when is it
appropriate to use the average market price of common stock during the year as the assumed
repurchase price?
a. Always
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b. Never
c. When the average market price is higher than the exercise price
d. When the average market price is lower than the exercise price

6. On January 1, 20x6, Hage Corporation granted options to purchase 9,000 of its ordinary shares at
₱7 each. The market price was ₱10.50 per ordinary share on March 31, 20x6, and averaged ₱9 per
share during the quarter then ended. There was no change in the 50,000 shares of outstanding
common stock during the quarter ended March 31, 20x6. Profit for the quarter was ₱8,268. The
number of shares to be used in computing diluted earnings per share for the quarter is
a. 59,000 b. 50,000 c. 53,000 d. 52,000
Solution:
Option shares 9,000
Multiply by: Total exercise price x.7
Proceeds from assumed exercise of options 63,000
Divide by: Average market price  ÷9
Treasury shares assumed to have been purchased 7,000

Option shares 9,000

Treasury shares assumed to have been purchased (7,000)
Incremental shares 2,000
Add: Actual shares outstanding 50,000
Total weighted average shares outstanding 52,000

7. The 20x7 profit of Mack Co. was ₱100,000, and 100,000 shares of its common stock were
outstanding during the entire year. In addition, there were outstanding options to purchase
10,000 shares of common stock at ₱10 per share. These options were granted in 20x5 and none
had been exercised by December 31, 20x7. Market prices of Mack's common stock during 20x7
were:
January 1 ₱20 per share
December 31 ₱40 per share
Average price ₱25 per share

The amount which should be shown as Mack's diluted earnings per share for 20x7 is (rounded to the
nearest cent)
a. ₱100,000 ÷ 110,000 shares = ₱.91 c. ₱100,000 ÷ 106,000 shares = ₱.94
b. ₱100,000 ÷ 105,000 shares = ₱.95 d. ₱100,000 ÷ 107,500 shares = ₱.93
Solution:
Option shares 10,000
Multiply by: Total exercise price x. 10
Proceeds from assumed exercise of options 100,000
Divide by: Average market price ÷. 25
Treasury shares assumed to have been purchased 4,000
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Option shares 10,000

Treasury shares assumed to have been purchased (4,000)
Incremental shares 6,000
Add: Actual shares outstanding 100,000
Total weighted average shares outstanding 106,000

8. Jones Corp.'s capital structure was as follows: December 31

Outstanding shares of stock: 20x5 20x4
Ordinary 110,000 110,000
Convertible preference shares 10,000 10,000
8% convertible bonds 1,000,000 1,000,000

During 20x5, Jones paid dividends of ₱3.00 per share on its preference shares. The preference shares
are convertible into 20,000 ordinary shares. The 8% bonds are convertible into 30,000 ordinary
shares. Profit for 20x5 is ₱850,000. The income tax rate is 30%. The diluted earnings per share for
20x5 is
a. 5.48 b. 5.66 c. 5.81 d. 6.26

Potential Incremental Incremental Incremental EPS Rank

ordinary shares earnings shares
A B C=A/B
Convertible PS 30,000 20,000 1.50 1st
(₱3 x 10,000);
(20,000)
Convertible 56,000 30,000 1.87 2nd
bonds (1,000,000
x 8% x 70%);
(30,000)

Diluted EPS
Profit Ordinary shares EPS
A B C=A/B
Basic EPS from 820,000* 110,000 7.45
continuing
operations
Convertible PS 30,000 20,000
(1st)
Diluted EPS #1 850,000 130,000 6.54 Dilutive
Convertible 56,000 30,000
bonds
(2nd)
Diluted EPS #2 906,000 160,000 5.66 Dilutive

9. Information relating to the capital structure of the Galaxy Company is as follows:

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Dec. 31, Dec. 31,

Outstanding shares of:
20x5 20x6
Ordinary shares 90,000 90,000
Convertible preference
shares 10,000 10,000
9% convertible bonds 1,000,000 1,000,000

During 20x6 Galaxy paid dividends of ₱6.00 per share on its preference shares. The preference share
is convertible into 10,000 ordinary shares. The 9% convertible bonds are convertible into 30,000
ordinary shares. The profit for the year ended December 31, 20x6, is ₱485,000. The income tax rate is
50%. What should be the diluted earnings per share for the year ended December 31, 20x6?
a. 3.79 b. 3.92 c. 4.08 d. 4.72

Potential Incremental Incremental Incremental EPS Rank

ordinary shares earnings shares
A B C=A/B
Convertible PS 60,000 10,000 6.00 2nd
(₱6 x 10,000);
(10,000)
Convertible 45,000 30,000 1.50 1st
bonds (1,000,000
x 9% x 50%);
(30,000)

Diluted EPS

Profit Ordinary shares EPS

A B C=A/B
Basic EPS from 425,000* 90,000 4.83
continuing
operations
Convertible PS 45,000 30,000
(1st)
Diluted EPS #1 470,000 120,000 3.92 Dilutive
Convertible 60,000 10,000
bonds
(2nd)
Diluted EPS #2 530,000 130,000 4.08 Anti-Dilutive

10. Throughout 1998, J Co. had 10,000 ordinary shares outstanding. There was no potential dilution
of earnings per share except as follows:

In 20x7, J Co. agreed to issue 2,000 additional shares of its stock to the former stockholders of an
acquired company if the acquired company's earnings for any of the five years 20x8 through 2x12
exceeded ₱5,000.
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Results of operations for 20x8 were:

Profit of J Co. ₱10,000
Profit of acquired company 4,000
Consolidated profit ₱14,000

Diluted earnings per share for 1998 on a consolidated basis would be

a. ₱14,000 ÷ 10,000 = ₱1.40 c. ₱15,000 ÷ 10,000 = ₱1.50
b. ₱14,000 ÷ 12,000 = ₱1.17 d. ₱15,000 ÷ 12,000 = ₱1.25

“Have I not commanded you? Be strong and courageous. Do not be afraid; do not be discouraged, for the
LORD your God will be with you wherever you go.” – (Joshua 1:9)

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