LAGUNA STATE POLYTECHNIC UNIVERSITY

SINILOAN, LAGUNA

Auditing and Assurance: Specialized Industry April 2, 2021

Module 05: EPS Instructor: John Bo S. Cayetano

LEARNING OBJECTIVES:
1. Compute Basic EPS
2. Compute Diluted EPS

REVIEW NOTES:
Basic earnings per share is the amount of income of one piece of ordinary share per year. Earnings
per share is not applicable to preference share since preference share has already fixed income
(basic dividend).

Step 1: Compute the amount net income attributable to ordinary shareholders.

Net income (after tax) P XX

Less: Preference shareholder dividends ( XX)
Net income attributable to ordinary shareholders P XX

Preference share dividend

PS is NON-CUMULATIVE PS is CUMULATIVE

Par of Outstanding + Subscribed PS X

With declaration No declaration Times: Dividend rate X
Actual dividend Zero One basic dividend X

Step 2: Compute the weighted average outstanding ordinary (WAOO) shares.

Share dividends and share splits will have an effect to all share transactions whether
issuance or reacquisition.

Number of Weight Share dividend or Weighted

shares split average
XX
XX Times Times x% (x2, x3) Times XX
12 months

Note! The numerator of the weight will be the number of months from the transaction date
up to December 31.

Step 3: Compute the basic earnings per share.

Net income – preference share dividend

= Basic Earnings Per Share
Weighted average outstanding ordinary

Net loss + preference share dividend

= Basic Loss Per Share
Weighted average outstanding ordinary
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DILUTED EPS
Diluted earnings per share is the lowest possible earnings per share assuming the “potential
shareholders” exercised their right to become a shareholder through the use of “diluter”
instrument. Diluter instrument are those instruments giving the holder the right to receive ordinary
shares, namely:

a) Convertible preference shares

b) Convertible bonds
c) Share options

The computation of diluted earnings per share will depend on which diluter is present. In
computing the DEPS you will have to assume that the right to become ordinary shareholder was
exercised (convertible PS was converted, convertible bonds was converted, share options was used
to purchase ordinary shares) immediately upon issuance of the diluter instrument.

a) Convertible preference shares

Step 1: Compute the numerator of the fraction.

Net Income
= Diluted Earnings Per Share
?

Since it is assumed that the preference share was converted, the preference shares will retired
and there will be no more preference shares, therefore no preference share dividend will be
given out and all the net income will be attributable to ordinary shareholders.

Step 2: Compute the denominator of the fraction.

?
= Diluted Earnings Per Share
WAOO + Weighted average potential ordinary

Weighted average potential ordinary:

Number of convertible preference shares XX

Times: Exchange rate of preference to ordinary (e.g., 1:2, 1:3, 1:5) XX
Potential ordinary shares XX
Times: Weight (e.g., 12/12 months, 5/12 months) XX
Weighted average potential ordinary XXX

Weight

Diluter instrument was issued last Diluter instrument was issued in

year or on January 1 between Jan. 1 and Dec. 31 of
the current year.

Weight (whole) Weight (not whole)

12 Number of months from issuance of diluter up to Dec. 31
12 12

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Step 3: Compute the diluted earnings per share.

Net Income
= Diluted Earnings Per Share
WAOO + Weighted average potential ordinary

b) Convertible bonds

Step 1: Compute the numerator of the fraction.

Net Income – PS dividend + Interest Income

Recorded After Tax = Diluted Earnings Per Share
?

Since it is assumed that the convertible bonds were converted. Was once the bonds is
converted it is extinguish and the company will no longer incur interest expense, so we have
to eliminate interest expense recorded. But since the interest expense was deducted to the
net income, it should be added back.

Since the net income in the numerator is net of tax, the interest income should be added back
also net of tax.

Step 2: Compute the denominator of the fraction.

?
= Diluted Earnings Per Share
WAOO + Weighted average potential ordinary

Weighted average potential ordinary:

Number of convertible bonds XX

Times: Exchange rate of preference to ordinary (e.g., 1:2, 1:3, 1:5) XX
Potential ordinary shares XX
Times: Weight (e.g., 12/12 months, 5/12 months) XX
Weighted average potential ordinary XX

Step 3: Compute the diluter earnings per share.

Net Income – PS dividend + Interest Income Recorded

After Tax = Diluted Earnings Per Share
WAOO + Weighted average potential ordinary

c) Share options

Step 1: Compute the denominator

Net income – preference share dividend (same as

basic EPS) = Diluted Earnings Per Share
?

The numerator of the fraction is not modified, the same as the numerator in the basic EPS.

Exercise price of the of the share options XX

Times: Number of share options (potential ordinary) XX
Total cash receipt from assumed exercised of options XX
Divide: Average fair value (market price) of company’s share XX
Assumed treasury shares (shares reacquired) XX

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 Potential OS (shares that will be issued if options were exercised) XX
Less: Assumed TS (shares reacquired using the process from assumed sale) (XX)
Incremental shares XX
Times: Weight (same rule in convertible preference share and bonds) x/12
Weighted incremental shares XX

Step 1: Compute the denominator

Net income – preference share dividend

Weighted average outstanding ordinary + weighted = Diluted Earnings Per Share
incremental

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DISCUSSION QUESTIONS:
1) Aludino Corporation had 1,000 ordinary shares issued and outstanding at January 1. During the
year, Aludino Corporation also had the ordinary share transactions listed below:

April 1 Issued 300 previously unissued shares.

May 1 Split the shares 2-for-1
June 30 Purchased 100 treasury shares.
July 30 Distributed a 20% bonus issue.
December 31 Split the shares 3-for-1

What is the weighted average number of shares that Aludino should use for earnings per share
purposes?
A. 9,720
B. 8,820
C. 8,640
D. 2,880

2) Safeguard Company reported the following capital structure on January 1, 2022:

Ordinary share capital, shares issued and outstanding 200,000 shares

Preference share capital, shares issued and outstanding 50,000 shares

On October 1, 2022, the entity issued a 10% stock dividend on ordinary shares and paid the annual
cash dividend of P200,000 on preference shares. The preference shares are noncumulative,
nonparticipating and nonconvertible. The net income for the current year was P1,920,000.

What amount should be reported as basic earnings per share?

A. 8.20
B. 8.72
C. 9.36
D. 7.82

3) Bianca Company had the following capital during 2020:

Preference share capital, P100 par, 10% cumulative, 30,000 shares 3,000,000
Ordinary share capital, P100 par, 50,000 shares 5,000,000

The entity reported net income of P4,000,000 for the current year. There are no preference
dividends in arrears on December 31, 2018. The entity paid no preference dividends during 2019
and paid P500,000 in preference dividends during 2020.

What amount should be reported as basic earnings per share for 2020?
A. 74
B. 80
C. 70
D. 68

4) Boo Company had the following ordinary share activity during the current year:
January 1 Outstanding 150,000 shares
May 1 New shares issued 30,000 shares
July 1 Treasury shares acquired 12,000 shares
December 1 Treasury shares resold 6,000 shares

The entity had 100,000 cumulative preference shares outstanding during the year. The
preference share has par value of P50 and 12% dividend rate. The entity sustained a net loss of
P2,690,000 for the current year.

What is the basic loss per share?

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 A. 12.71
B. 16.35
C. 18.64
D. 20.00

5) Filipina Company provided the following extract from the statement of comprehensive income
for the year ended December 31, 2020:

Income before tax 6,000,000

Income tax expense 1,800,000

The entity paid during the year an ordinary dividend of P1,000,000 and a dividend on the
redeemable preference shares of P500,000. The entity had P1,000,000 of P5 par value ordinary
shares in issue throughout the year and 500,000 authorized ordinary shares.

What amount should be reported as basic earnings per share for the year?
A. 30.00
B. 27.50
C. 21.00
D. 18.50

Numbers 6, 7 and 8
Biggy Company reported profit of P770,000 for 2020. Biggy sold 15,000 treasury shares acquired in
a previous year on July 1 and 15,000 new shares on November 1. At year-end, 180,000 shares were
outstanding. Biggy had 20,000 shares of P100 par value 7% preference shares outstanding all year.
Biggy paid dividends to preference shareholders as stipulated.

6) The weighted average number of ordinary shares used to compute earnings per share for 2020
is
A. 190,000
B. 160,000
C. 165,000
D. 180,000

7) What is the basic earnings per share for 2020?

A. 3.50
B. 3.94
C. 4.81
D. 3.32

8) If the preference share is convertible into two ordinary shares, the diluted earnings per share
for 2020 is
A. 3.85
B. 3.94
C. 4.81
D. 3.35

Numbers 9 and 10
On January 1, 2023, Buraka Company had 480,000 P60 par ordinary shares and 100,000, 9% P100 par
convertible cumulative preference shares outstanding. The preference shares are convertible into
100,000 ordinary shares before share dividend and share split. During 2023, the following
transactions affected the ordinary shares:

February 1 Issued 120,000 shares

March 1 Issued a 20% share dividend
May 1 Acquired 100,000 treasury shares
June 1 Issued a 3-for-1 split
October 1 Reissued 60,000 treasury shares
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The net income was P32,560,000 and Buraka did not declare dividend on preference shares.

9) What amount should be reported as basic EPS for 2023?

A. 16.54
B. 16.79
C. 16.96
D. 16.33

10) What amount should be reported as diluted EPS for 2023?

A. 14.16
B. 13.77
C. 15.53
D. 15.97

11) At December 31, 2024, Frown Company had 2,000,000 ordinary shares outstanding. On July 1,
2025, Frown issued 500,000 preference shares which were convertible into 300,000 ordinary
shares. During 2025, Frown declared and paid P1,000,000 cash dividends on the ordinary shares
and P800,000 cash dividends on the preference shares. Net income for the year ended
December 31, 2025 was P6,500,000.

What amount should be reported as diluted earnings per share for the year December 31, 2025?
A. 3.02
B. 2.85
C. 2.83
D. 1.75

12) Nicole Company reported the following data at December 31, 2022:

Net income for the year 2022 3,464,000

Ordinary share, P100 par 2,500,000
10% bonds payable (issued on prior to 2022) 1,000,000

There were no transactions in ordinary shares in 2022. The bonds are convertible into ordinary
shares in the ratio of 5 ordinary shares for each P1,000 bond. The income tax rate is 30%.
Compute the basic and diluted EPS:

None of the bonds were converted in 2022:

BEPS DEPS
A. 138.56 117.80
B. 138.56 135.92
C. 138.56 113.13
D. 138.56 130.54

13) On July 1, 2023, Charlotte Company issued at par P2,000,000 7% convertible bonds. Each P1,000
bonds are convertible into 10 ordinary shares. No bonds were converted during 2023. The entity
had 200,000 ordinary shares outstanding during 2023. The net income for 2023 was P600,000
and the income tax rate was 30%.

What amount should be reported as diluted earnings per share on December 31, 2023?
A. 3.17
B. 3.00
C. 3.09
D. 2.95

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14) Igor Company had 200,000 ordinary shares issued and outstanding at December 31, 2020. On
July 1, 2021, Igor Company issued a 10% bonus issue. Unexercised share options to purchase
40,000 ordinary shares at P20 per share were outstanding at the beginning and end of 2021. The
market price of Igor share was P25 during 2016. Profit for the year ended December 31, 2021 was
P1,100,000.

What is Igor Company’s 2021 diluted earnings per share, rounded to nearest cent?
A. 5.05
B. 5.00
C. 4.81
D. 4.23

15) Denise Company reported net income of P720,000 for the year ended December 31, 2023.

Ordinary shares outstanding at January 1, 2023 80,000

Incentive share option vested in 2022 outstanding throughout 2023 24,000

Each option is exercisable for one share at an exercise price of P37.50 during the year. The
market price of the share averaged P45 during the year.

On August 30, Denise sold 15,000 ordinary shares. Denise’s only debt consisted of P50,000 of
10% short term bank note. The income tax rate is 30%. What amount should be reported as
diluted earnings per share?
A. 8.09
B. 6.60
C. 6.05
D. 8.13

16) Information relating to the capital structure of the ROMERO Company is as follows

Outstanding securities 2020 2021

Ordinary 1,000,000 1,000,000
Convertible preference shares 100,000 100,000
10% convertible bonds P30,000,000 P30,000,000

During 2022, Romero paid dividends of P15 per share on its preference shares. The preference
shares are convertible into 150,000 ordinary shares and the 10% bonds are convertible into
300,000 ordinary shares. Profit for 2022 was P10,000,000. The income tax rate is 35%.

The diluted earnings per share for 2022 should be

A. 8.50
B. 8.24
C. 8.04
D. 7.50

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Numbers 17 and 18
The information below pertains to Nozoni Company.

Profit for the year 1,200,000

8% convertible bonds issued at par (P1K per bond). One bond is 2,000,000
convertible into 40 ordinary shares
6% convertible into 3 ordinary shares, cumulative preference shares, 3,000,000
P100 par value.
Ordinary shares, P10 par value 6,000,000
Share options (granted in a prior year) to purchase 50,000 ordinary 500,000
shares at P20 per share
Tax rate 40%
Average market price of ordinary shares P25/share

There were no changes during the year in the number of ordinary shares, preference shares, or
convertible bonds outstanding. There is no treasury share.

17) What is the basic earnings per share?

A. 2.00
B. 1.82
C. 1.70
D. 1.07

18) What is the diluted earnings per share?

A. 1.70
B. 1.66
C. 1.62
D. 1.26

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MODULE 05:

1) The following equity transaction affecting Hatchan Company during 2016 follow:

Date Share change # of shares

January 1 Shares outstanding 44,000
February 1 Issued for cash 56,000
May 1 Acquired treasury shares 25,000
August 1 Distributed 25% bonus issue 25% of outstanding shares
September 1 Resold part of treasury shares 10,000
November 1 Issued 2-for-1 share split

What is the weighted average number of outstanding shares to be used in the calculation of
basic earnings per share?
A. 207,500 B. 203,333 C. 201,667 D. 190,000

2) Anchi Company reported profit for the year amounting to P4,000,000, Anchi has the following
equity instrument:

• 10,000, 10% cumulative preference shares issued and outstanding with par value of P400 per
share.
• 20,000, 5%, non-cumulative preference shares issued and outstanding with par value of P80
per share.
• 11,000 ordinary shares issued and outstanding with par value of P20 per share.

Anchi Company declared the following dividends during the year:

• P600,000 to cumulative preference shares;

• P100,000 to non-cumulative preference share; and
• P110,000 to ordinary shares.

Dividends in arrears on cumulative preference share as of the beginning of the year amounted
to P800,000. There were no issuance or acquisitions of ordinary shares during the period.

How much is the earnings per share for the period?

A. 320.00 B. 318.18 C. 310.00 D. 308.18

Use the following information for the next two (2) questions:
Pacito Corp. had 250,000 ordinary shares outstanding on January 1, 2020, prior to 2020, the
company issued 6,000, P1,000 face value, 10% convertible bonds. The company has no other
potentially dilutive securities. The bonds were converted on October 1, 2020 and 40 ordinary shares
were issued in exchange for each bond. Accrued interest on the bonds was recorded and paid on
that date. Profit for the year was P4,000,000. The income tax rate is 30%

3) How much is the basic earnings per share?

A. 8.56 B. 8.81 C. 9.02 D. 12.90

4) How much is the diluted earnings per share?

A. 8.56 B. 8.81 C. 9.02 D. 12.90

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Use the following information for the next two (2) questions:
During 2016, Hercule Corporation had the following two classes of shares issued and outstanding
for the entire year:

• 200,000 ordinary shares, P10 par.

• 2,000 P100 par preference shares, 8%.

Each preference share is convertible into two ordinary shares. Hercule Corporation’s profit for 2016
was P1,800,000. Income tax rate is 30%.

5) How much is the basic earnings per share?

A. 8.92 B. 8.29 C. 9.06 D. 9.00

6) How much is the diluted earnings per share?

A. 8.91 B. 8.19 C. 8.28 D. 8.82

7) Japan company reported the following data at December 31, 2021:

Net income for the year 2021 3,700,000

Ordinary share, P100 par 2,500,000
10% bonds payable (issued prior to 2021) 1,000,000

The bonds are convertible into ordinary shares in the ratio of 5 ordinary shares for each P1,000
bond.

The income tax rate is 35%. What is the diluted earnings per share?
A. 148 B. 125.50 C. 126.67 D. 150.60

Use the following information for the next three (3) questions:
Bringmeout Corporation reported profit for 2020 of P177,500. Bringmeout began the year with
100,000 shares of P5 par value ordinary shares outstanding and 2,500 shares of P100 par value 8%
preference shares outstanding. On October 1, Bringmeout sold 10,000 shares of ordinary shares for
P6 per share. Bringmeout paid dividends to both the ordinary and preference shareholders in
December.

8) The weighted average number of ordinary shares to be used in the computation of basic
earnings per share for 2020 is
A. 100,000 B. 102,500 C. 105,000 D. 110,000

9) How much is the basic earnings per share for 2020?

A. 1.43 B. 1.50 C. 1.54 D. 1.73

10) If each preference share is convertible into 8 ordinary shares, what is the diluted earnings per
share for 2020?
A. 1.29 B. 1.45 C. 1.54 D. 1.73

End of Assessment 06

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