Page |1

Chapter 15
Earnings per Share

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. FALSE – “addition” not “reduction”
4. TRUE
5. TRUE
6. FALSE
7. TRUE
8. TRUE
9. TRUE
10. FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. A
2. D
3. D
4. A
5. C
6. D
7. D
8. B
9. A
10. C
 Page |2

PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  
Basic 1,000,000 – (10,000 x 5% x ₱100)
=
EPS 100,000
Basic EPS = (1,000,000 – 50,000) ÷ 100,000 = 9.50

2. A
Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  
Basic 960,000 – 100,000
=
EPS (200,000 x 110%)
Basic EPS = 860,000 ÷ 220,000 = 3.91

3. B
Date No. of shares Months outstanding Weighted average
  (a) (b) (c) = (a) x (b)
Jan. 1 20,000 + 20,000 12/12 40,000
Apr. 1 N/A (effect is on Jan. 1) - -
July 1 10,000 6/12 5,000
Weighted average number of ordinary
shares 45,000

4. C
Solution:
(30,000 + 3,000) x
1/1/x8 Shares outstanding
12/12 33,000
2/1/x8 10% share dividend see effect on Jan. 1
3/1/x8 Business combination (9,000 x 10/12) 7,500
7/1/x8 Issued for cash (8,000 x 6/12) 4,000
 Page |3

44,50
Weighted average shares
0

5. B
Solution:
The weighted average outstanding shares are computed as
follows:
Outstandin Months
  g shares outstanding Weighted average
Jan. 1, 20x3 20,000.00 12/12 20,000
May 1,
20x3 10,500.00 8/12 7,000
27,000

Profit or loss less Preferred dividends  

Basic
= Weighted average number of outstanding ordinary
EPS
shares  
Basic 96,700 – (10,000 x ₱4)
=
EPS 27,000
Basic EPS = 56,700 ÷ 27,000 = 2.10

6. C
Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  
Basic 10,075,000 – 0
=
EPS 1,625,000(a)
Basic EPS = 10,075,000 ÷ 1,625,000 = 6.20

(a)
Jan. 1, 20x3 (500,000 x 110% x 2 x 12/12) 1,100,000
 (180,000 x 110% x 2 x 10/12) 330,000
 -
 Page |4

 (200,000 x 2 x 6/12) 200,000

 -
 -
 (-60,000 x 1/12) (5,000)
Weighted average outstanding shares 1,625,000

7. D
Solution:
  20x2 20x1

Profit 350,000 410,000

Weighted ave. outs. Sh.

(200,000 x 3 x 12/12) - (30,000 x 3 x 9/12) 532,500

(200,000 x 3 x 12/12) 600,000

Basic EPS 0.66 0.68

8. B
Solution:
Fair value of shares selling right-on (given) 1.25
Less: Value of 1 right (a) (0.05)
Fair value of shares selling ex-right 1.20

Fair value of share right-on – Subscription

(a)
Value of 1 price
=
right No. of rights needed to purchase one share +
1
Value of 1 1.25 – 0.70
=
right 10 + 1
Value of 1 right = (0.55 ÷ 11) = 0.05

       

Adjustmen Fair value of shares selling right-on  

=
t factor Fair value of shares selling ex-right  
       
 Page |5

Adjustment factor = 1.25/1.20 or 1.04167

Alternative solution: Using the definition

For this solution, we’ll need to assume a value for the number of
outstanding shares before the rights issue. Let’s assume 1,000
shares.

Aggregate mkt. value of shares before exercise of rts.

(1,000 sh. x ₱1.25) 1,250
Add: Proceeds from exercise of rts. [(1,000 rts. ÷ 10) x
₱0.70] 70
Total 1,320
Divide by: Outstanding shares after exercise of rts.
[1,000 sh. + (1,000 rts. ÷ 10 rts. per sh.)] 1,100
Fair value of shares selling ex-right 1.20

Adjustment factor = 1.25/1.20 or 1.04167

9. A

Fair value of shares selling right-on (given) 1.40

Less: Value of 1 right (a) (0.05)
Fair value of shares selling ex-right 1.35

Fair value of share right-on – Subscription

(a)
Value of 1 price
=
right No. of rights needed to purchase one share +
1
Value of 1 1.40 – 1.00
=
right 7+1
Value of 1 right = (0.40 ÷ 8) = 0.05

       

Adjustmen Fair value of shares selling right-on  

=
t factor Fair value of shares selling ex-right  
       

Adjustment factor = 1.40/1.35

 Page |6

Jan. 1: (350,000 x 1.40/1.35 x 3/12) 90,741

300,00
Apr. 1: (400,000(b) x 9/12)
0
Weighted average no. of outstanding ordinary shares 390,741

(b)
[350,000 before issue + (350,000 rts. ÷ 7)] = 400,000

Profit for the year 275,000

Divide by: Weighted average no. of outstanding shares 390,741
Basic earnings per share 0.704

10. D
Solution:

Fair value of shares selling right-on (given) 160

Less: Value of 1 right (a) (10)
Fair value of shares selling ex-right 150

Fair value of share right-on – Subscription

(a)
Value of 1 price
=
right No. of rights needed to purchase one share +
1
Value of 1 160 – 100
=
right 5+1
Value of 1 right = (60 ÷ 6) = 10

       

Adjustmen Fair value of shares selling right-on  

=
t factor Fair value of shares selling ex-right  
       

Adjustment factor = 160/150

 Page |7

Jan. 1: (300,000 x 160/150 x 3/12) 80,000

270,00
Apr. 1: (360,000(b) x 9/12)
0
Weighted average no. of outstanding ordinary shares 350,00

(b)
[300,000 before issue + (300,000 rts. ÷ 5)] = 360,000

6,000,00
Profit for the year
0
Divide by: Weighted average no. of outstanding shares 350,000
Basic earnings per share 17.14

11. C
Solution:
Profit or loss plus After tax interest expense on
convertible bonds  
Dilute Weighted average number of outstanding
=
d EPS ordinary shares plus Incremental shares arising
from the assumed conversion or exercise of
dilutive potential ordinary shares  

Numerator on Diluted EPS = 900,000 + 0 = 900,000

12. C
Solution:
600,00
Jan. 1, 20x3 Outstanding shares (600,000 x 12/12) 0
Apr. 1, 20x3 Additional shares 135,00
issued (180,000 x 9/12) 0
Incremental shares from conv. 150,00
bonds (150,000 x 12/12) 0
Weighted average outstanding 885,00
shares 0

13. D
 Page |8

Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  
Basic 2,400,000 – (6% x 1,000,000)
=
EPS 200,000
Basic EPS = 2,340,000 ÷ 200,000 = 11.70

Profit or loss plus After tax interest expense on

convertible bonds  
Dilute Weighted average number of outstanding
=
d EPS ordinary shares plus Incremental shares arising
from the assumed conversion or exercise of
dilutive potential ordinary shares  

Diluted EPS = (2,400,000 + 0) ÷ [200,000 + (50,000 x 2)]

Diluted EPS = 2,500,000 ÷ 300,000 = 8.00

14. B
Solution:
Profit or loss plus After tax interest expense on
convertible bonds  
Dilute Weighted average number of outstanding
=
d EPS ordinary shares plus Incremental shares arising
from the assumed conversion or exercise of
dilutive potential ordinary shares  

Dilute 840,000 + 0  
=
d EPS 200,000 + (20,000 x 5)  
Diluted EPS = 840,000 ÷ 300,000 = 2.80
 Page |9

15. D
Solution:
Profit or loss plus After tax interest expense on
convertible bonds  
Dilute Weighted average number of outstanding
=
d EPS ordinary shares plus Incremental shares arising
from the assumed conversion or exercise of
dilutive potential ordinary shares  

Dilute 1,000 + (10,000 x 4% x 50%)  

=
d EPS 1,000 + 1,000  
Diluted EPS = 1,200 ÷ 2,000 = 0.60

16. B
Solution:
Profit or loss plus After tax interest expense on
convertible bonds  
Dilute Weighted average number of outstanding
=
d EPS ordinary shares plus Incremental shares arising
from the assumed conversion or exercise of
dilutive potential ordinary shares  

35,000 + (20 bonds x 10,000 face amt. x 7% x 6/12 x

Dilute
= 70%)  
d EPS
10,000 + (20 x 200)  

Diluted EPS = (35,000 + 4,900) ÷ (10,000 + 4,000) = 2.85

Diluted EPS = 39,900 ÷ 14,000 = 2.85

17. A
Solution:

Basic EPS = (3.6M profit – 0 preferred dividends) ÷ 280,000 sh. = 12.86

 P a g e | 10

Dilute Profit (Loss) plus After tax interest expense  

=
d EPS Weighted average shares plus Incremental shares  

3,600,000 + 0  
Diluted EPS =
280,000 + 12,500(a)  

Diluted EPS = 3,600,000 ÷ 292,500 = 12.31

(a)
Option shares 50,000
Multiply by: Total exercise price 90
(80 exercise price + 10 fair value of each share option)
Proceeds from assumed exercise of options 4,500,000
Divide by: Average market price 120
37,50
Treasury shares assumed to have been purchased
0

Option shares 50,000

Less: Treasury shares assumed to have been
purchased (37,500)
Incremental shares 12,500

18. D
Solution:

Basic EPS = (285K profit – 0 preferred dividends) ÷ 180,000 sh. = 1.58

Dilute Profit (Loss) plus After tax interest expense  

=
d EPS Weighted average shares plus Incremental shares  
285,000 + 0  
Diluted EPS =
180,000 + 1,500(a)  
Diluted EPS = 285,000 ÷ 181,500 = 1.57

(a)
Option shares 15,000
Multiply by: Total exercise price 20
Proceeds from assumed exercise of options 300,000
 P a g e | 11

Divide by: Average market price 25

12,00
Treasury shares assumed to have been purchased
0

Option shares 15,000

Less: Treasury shares assumed to have been
purchased (12,000)
Incremental shares 3,000
Multiply by: Months outstanding (i.e., July 1 to Dec. 31) 6/12
Weighted average incremental shares 1,500

19. D
Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  

Basic -900,000 – (500,000 x 6%)  

=
EPS 200,000  

Basic EPS = (-900,000 - 30,000) ÷ 200,000

Basic EPS = -930,000 ÷ 200,000 = (4.65)

Profit or loss plus After tax interest expense on

Dilute convertible bonds  
=
d EPS Weighted average number of outstanding ordinary
shares plus Incremental shares  

Dilute -900,000 + 0  
=
d EPS 200,000 + (50,000 x 2)  

Diluted EPS = -900,000 ÷ 300,000 = (3.00)

The diluted loss per share decreased the basic loss per share
(anti-dilutive). Therefore, Party, Inc. shall report only the Basic
loss per share.
 P a g e | 12

20. C
Solution:
Basic earnings per share:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  

Basic 6,000,000 – (8% x ₱100 par x 100,000 sh.)  

=
EPS 500,000  

Basic EPS = (6,000,000 – 800,000) ÷ 500,000

Basic EPS = 5,200,000 ÷ 500,000 = 10.40

Diluted earnings per share:

The multiple potential ordinary shares are ranked according to
their dilutive effect as follows:
Convertible
  Options bonds Convertible PS
Incremental
earnings - 159,930 800,000
Incremental shares 8,000 20,000 200,000
Incremental EPS - 8.00 4.00

Ranking 1st 3rd 2nd

 Options:
Option shares 40,000
Multiply by: Exercise price 100
Proceeds from assumed exercise of options 4,000,000
Divide by: Average market price 125
32,00
Treasury shares assumed to have been purchased
0

Option shares 40,000

Less: Treasury shares assumed to have been purchased (32,000)
Incremental shares 8,000

 Convertible bonds: (1,903,927 x 12% x 70% = 159,930); [(2M ÷ 1,000) x 5 = 10,000]

 Convertible PS: (100,000 sh. x ₱100 par x 6% = 600,000); (100,000 x 2 = 200,000)

 P a g e | 13

 Ranking: The Options are ranked 1st because they have the least
incremental EPS. The Convertible bonds are ranked last because they have
the highest incremental EPS.

Ordinary
Profit sh. EPS
Basic EPS 5,200,000 500,000 10.40
Options (1st rank) - 8,000
Dilutiv
Diluted EPS #1 5,200,000 508,000 10.24 e
Convertible PS (2nd
rank) 800,000 200,000
Dilutiv
Diluted EPS #2 6,000,000 708,000 8.47 e
Convertible bonds
(3rd rank) 159,930 10,000
Anti-
Diluted EPS #3 6,159,930 718,000 8.58 dilutive

Answers:
 Basic EPS = 10.40
 Diluted EPS = 8.47
 P a g e | 14

PROBLEM 4: FOR CLASSROOM DISCUSSION

1. Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  

Basic EPS = [500K - (250K x 4%)] ÷ 200,000 sh. = 2.45

2. Solution:
Months Weighted
Date No. of sh.
outstanding average
(a) (b) (c) = (a) x (b)
1/1/2003 660,000* 12/12 660,000
7/1/2003 - - -
10/1/2003 (48,000) 3/12 (12,000)
648,000
* 600,000 x 110% = 660,000

3. Solution:
  2005 2004

Profit 410,000 350,000

Weighted ave. outs. sh.

(100,000 x 2 x 12/12) + (20,000 x 2 9/12) 230,000

(100,000 x 2 x 12/12) 200,000

Basic EPS 1.78 1.75

4. Solution:
Fair value of shares selling right-on (given) 480
Less: Value of 1 right (a) ( 30)
Fair value of shares selling ex-right 450

(a)
Value of 1 = Fair value of share right-on – Subscription
right price
No. of rights needed to purchase one share +
 P a g e | 15

1
Value of 1 480 – 300
=
right 5+1
Value of 1 right = (180 ÷ 6) = 30

       

Adjustmen Fair value of shares selling right-on  

=
t factor Fair value of shares selling ex-right  
       

Adjustment factor = 480/450

320,00
Jan. 1: (400,000 x 480/450 x 9/12)
0
120,00
Apr. 1: (480,000 (b) x 3/12)
0
Weighted average no. of outstanding ordinary shares 440,000

(b)
Ordinary shares before the exercise of rights 400,000
Shares issued on the exercise of rights
(400,000 rights ÷ 5 rights needed to purchase one share) 80,000
Outstanding shares after the exercise of rights 480,000

Profit for the year 8,000,000

Divide by: Weighted average no. of outstanding shares 440,000
Basic earnings per share 18.18

5. Solution:

Profit (Loss) plus After tax interest expense on

convertible bonds  
Dilute Weighted average number of outstanding ordinary
=
d EPS shares plus Incremental shares arising from the
assumed conversion or exercise of dilutive
potential ordinary shares  

Diluted EPS = 840,000 + 0  

 P a g e | 16

200,000 + (20,000 x 5)  

Diluted EPS = 840,000 ÷ 300,000 = 2.80

6. Solution:
Profit (Loss) plus After tax interest expense on
convertible bonds  
Dilute Weighted average number of outstanding ordinary
=
d EPS shares plus Incremental shares arising from the
assumed conversion or exercise of dilutive
potential ordinary shares  

Dilute 500,000 + (50,000 x 4% x 60%*)  

=
d EPS 5,000 + 5,000  
*60% = 1 – 40% tax rate
Diluted EPS = (500,000 + 1,200) ÷ 10,000
Diluted EPS = (501,200 ÷ 10,000) = 50.12

7. Solution:

Dilute Profit (Loss) plus After tax interest expense  

=
d EPS Weighted average shares plus Incremental shares  

15,000,000 + 0  
Diluted EPS =
500,000 + 10,000(a)  

Diluted EPS = 15,000,000 ÷ 510,000 = 29.41

(a)
Option shares 50,000
Multiply by: Total exercise price 200
(180 exercise price + 20 fair value of each share option)
10,000,00
Proceeds from assumed exercise of options
0
 P a g e | 17

Divide by: Average market price 250

40,00
Treasury shares assumed to have been purchased
0

Option shares 50,000

Less: Treasury shares assumed to have been
purchased (40,000)
Incremental shares 10,000

8. Solution:

 Concept:
If the contract can be settled in ordinary shares or in cash at the
entity’s option, it is presumed that the contract will be settled in
ordinary shares.
Accordingly, the “regular” computations for both basic and
diluted EPS will be applied to the problem. The settlement option
is simply ignored.

Basic EPS = (2M profit – 0 preferred dividends) ÷ 100,000 sh. = 20.00

Dilute Profit (Loss) plus After tax interest expense  

=
d EPS Weighted average shares plus Incremental shares  

2,000,000 + 73,482(a)  
Diluted EPS =
100,000 + 50,000  

Diluted EPS = 1,073,482 ÷ 150,000 = 13.82

(a)

F Fair value of bonds without conversion feature:

(₱1M x PV of ₱1 @10%, n=3) + (₱120K x PV of an ordinary annuity @10%,
n=3) = (₱1M x 0.751315) + (₱120K x 2.486852) = 1,049,737
F After tax interest expense:
(1,049,737 x 10% x 70%) = 73,482
 P a g e | 18

9. Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  

Basic -900,000 – (5,000,000 x 6%)  

=
EPS 2,000,000  

Basic EPS = (-900,000 - 300,000) ÷ 2,000,000

Basic loss per share = -1,200,000 ÷ 2,000,000 = (0.60)

Profit or loss plus After tax interest expense on

Dilute convertible bonds  
=
d EPS Weighted average number of outstanding ordinary
shares plus Incremental shares  

Dilute -900,000 + 0  
=
d EPS 2,000,000 + (500,000 x 2)  

Diluted EPS = -900,000 ÷ 3,000,000 = (0.30)

Answer: The diluted loss per share decreased the basic loss per
share (anti-dilutive). Therefore, Bark Co. shall report only the
Basic loss per share.

10. Solution:

Basic earnings per share:

Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  

Basic 5,000,000 – (6% x ₱100 par x 100,000 sh.)  

=
EPS 200,000  

Basic EPS = (5,000,000 – 600,000) ÷ 200,000

Basic EPS = 4,400,000 ÷ 200,000 = 22.00
 P a g e | 19

Diluted earnings per share:

The multiple potential ordinary shares are ranked according to
their dilutive effect as follows:
Convertible Convertible
  PS Options bonds
Incremental
earnings 600,000 - 146,963
Incremental shares 200,000 10,000 40,000
Incremental EPS 3.00 - 3.67

Ranking 2nd 1st 3rd

 Convertible PS: (100,000 sh. x ₱100 par x 6% = 600,000); (100,000 x 2 = 200,000)

 Options:
Option shares 50,000
Multiply by: Exercise price 200
10,000,00
Proceeds from assumed exercise of options
0
Divide by: Average market price 250
40,00
Treasury shares assumed to have been purchased
0

Option shares 50,000

Less: Treasury shares assumed to have been purchased (40,000)
Incremental shares 10,000

 Convertible bonds: (2,099,474 x 10% x 70% = 146,963); [(2M ÷ 1,000) x 20= 40,000]
 Ranking: The Options are ranked 1st because they have the least
incremental EPS. The Convertible bonds are ranked last because they have
the highest incremental EPS.

Ordinary
Profit sh. EPS
Basic EPS 4,400,000 200,000 22.00
Options (1st rank) - 10,000
Diluted EPS #1 4,400,000 210,000 20.95 Dilutiv
 P a g e | 20

e
Convertible PS (2nd
rank) 600,000 200,000
Dilutiv
Diluted EPS #2 5,000,000 410,000 12.20 e
Convertible bonds
(3rd rank) 146,963 40,000
Dilutiv
Diluted EPS #3 5,146,963 450,000 11.44 e

Answers:
 Basic EPS = 22.00
 Diluted EPS = 11.44