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Chapter 15
Earnings Per Share

NAME: Date:
Professor: Section: Score:

QUIZ:
1. What is the correct treatment of a stock dividend (share dividend) issued in mid-year when
computing the weighted-average number of common (ordinary) 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. When computing diluted earnings per share, stock options are

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

3. Mail Co.'s issued and outstanding share capital throughout the period consists of 500,000 ordinary
shares of ₱0.20 par and 80,000 preference shares of ₱1 par. Profit after tax for the period is ₱320,000
and the preference dividend is ₱8,000. Basic EPS for the period is:
a. 0.602 b. 0.624 c. 0.642 d. 0.660

4. Jack Co. has the following share capital outstanding during 20x1 and 20x2:
Preference shares, ₱100 par, 10% cumulative 2,000,000
Ordinary shares, ₱50 par 5,000,000

Jack reported profit of ₱4,000,000 for the year ended December 31, 20x2. Jack paid no preferred
dividends during 20x1 and paid ₱200,000 in preferred dividends during 20x2. What basic earnings per
share is presented in Jack Co.’s December 31, 20x2 statement of profit or loss?
a. 42.00 b. 38.00 c. 37.60 d. 36.70

5. On 1 January 2015, N-Stall, Inc.'s issued share capital consisted of 120,000 ordinary shares of ₱1. On
1 May 2015, N-Stall issued another 30,000 ordinary shares and on 1 July 2015 N-Stall issued a
further 50,000 shares. Both issues were made at full market price. The weighted average number of
shares outstanding during the year to 31 December 2015 was:
a. 165,000 b. 166,340 c. 167,500 d. 168,000

6. A company's profit after tax for the year to 30 June 2016 was ₱10,000,000. The company's issued
share capital at 1 July 2015 consisted of 2,400,000 ordinary shares of ₱0.50 par each. A further
300,000 shares were issued at full market price on 1 September 2015. Basic EPS for the year is:
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a. 3.33 b. 3.56 c. 3.63 d. 3.77

7. A company's profit after tax for the year to 31 December 2015 was ₱150,000. The comparative figure
for 2014 was ₱135,000. The company's issued share capital at 1 January 2014 consisted of 240,000
ordinary shares. A 1 for 4 bonus issue was made on 1 July 2015. There were no other share issues in
either year. Basic EPS for 2015 and restated basic EPS for 2014, respectively are:
2015 2014 2015 2014
a. 0.45 0.50 c. 0.55 0.48
b. 0.48 0.52 d. 0.50 0.45

8. 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

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

Outstanding shares of: Dec. 31, 20x5 Dec. 31, 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

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.

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)
- END -
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ANSWERS:
1. C
2. A
3. B

Profit or loss less Preferred dividends

Basic EPS =
Weighted average number of outstanding ordinary shares

320,000 – 8,000
Basic EPS =
500,000
Basic EPS = 312,000 ÷ 500,000 = 0.624

4. B

Profit or loss less Preferred dividends

Basic EPS =
Weighted average number of outstanding ordinary shares

4,000,000 – (2,000,000 x 10%)

Basic EPS =
(5,000,000 ÷ 50 par)
Basic EPS = 3,800,000 ÷ 100,000 = 38.00

5. A (120,000 x 12/12) + (30,000 x 8/12) + (50,000 x 6/12) = 165,000

6. D

Profit or loss less Preferred dividends

Basic EPS =
Weighted average number of outstanding ordinary shares

10,000,000 –0
Basic EPS =
(2,400,000 x 12/12) + (300,000 x 10/12)
Basic EPS = 10,000,000 ÷ 2,650,000 = 3.77

7. D
2015: [150,000 ÷ (240,000 x 125%*)] = 150,000 ÷ 300,000 = 0.50

*100% + (1 ÷ 4 stock dividend) = 125%

2014: [135,000 ÷ (240,000 x 125%*)] = 135,000 ÷ 300,000 = 0.45

8. D
Solution:
Option shares 9,000
Multiply by: Total exercise price 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

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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

9. B
Solution:
The multiple potential ordinary shares are ranked in accordance with their dilutive effect as follows:
Incremental
Potential ordinary shares Incremental shares Incremental EPS Rank
earnings
a b c=a÷b
a. Convertible PS 60,000 10,000 6.00 2nd
(₱6.00 x 10,000); (10,000)
b. Convertible bonds 45,000 30,000 1.50 1st
(1,000,000 x 9% x 50%);
(30,000)

Diluted EPS is calculated by gradually considering the potential ordinary shares starting with the first in
rank as shown below:

Profit Ordinary shares EPS

a b c=a÷b
Basic EPS from continuing operations 425,000* 90,000 4.83
Convertible Bonds - (1st) 45,000 30,000
Diluted EPS #1 470,000 120,000 3.92 Dilutive
Convertible PS - (2nd) 60,000 10,000
Diluted EPS #2 530,000 130,000 4.08 Anti-dilutive

* Numerator for basic EPS, net of preferred dividends: (485,000 – 60,000) = 425,000.

10. A The contingent shares are ignored because the condition is not met.