EPS MCQS (42)

1
FAR511327
Ian Co. is calculating earnings per share amounts for inclusion in the Ian's annual
report to shareholders. Ian has obtained the following information from the
controller's office as well as shareholder services:
Net income from january 1 to december 31 $125,000

Number of outstanding shares:
January 1 to March 31 15,000
April 1 to May 31 12,500
June 1 to December 31 17,000
In addition, Ian has issued 10,000 incentive stock options with an exercise price
of $30 to its employees and a year-end market price of $25 per share. What amount
is Ian's diluted earnings per share for the year ended December 31?
$4.63
$4.85
$7.35
$7.94
The correct answer is (d).

Diluted earnings per share will equal to the basic earnings per share. The stock
options will have no effect on the earnings per share as the exercise price of the
stock exceeds its market price.
Basic/Diluted EPS = Income available to common shareholders/Weighted average number
of common shares outstanding.
Ref Common stock o/s Total number of

weighted shares o/s Shares o/s
a January 1 to March 31 = (15,000 c/s x (3/12) 3,750
b April 1 to May 31 = (12,500 c/s x (2/12) 2,083
c June 1 to December 31 = (17,000 c/s x (7/12) 9,917
d Weighted average no. of shares o/s (a+b+c)
15,750
Basic/Diluted EPS = $7.94 ($125,000/15,750 shares).
Option (a), (b) and (c) are incorrect as per the above explanation.
2
FAR516993
Select which of the following statement is not true?
For purposes of computing EPS in consolidated financial statements (both basic and
diluted), if one or more less-than-wholly-owned subsidiaries are included in the
consolidated group, income from continuing operations and net income shall include
the income attributable to the non-controlling interest in subsidiaries.
Preferred stock dividends that an issuer has paid or intends to pay in its own
common shares shall be deducted from net income in computing income available to
common stockholders.
Options, warrants, unvested share-based payment awards and convertible securities

are excluded from the basic EPS calculation.
Contingently issuable shares are included in basic EPS only if little or no cash
consideration upon the satisfaction of certain conditions and all the necessary
conditions for the issuance of such shares have been satisfied by the end of the
period.
The correct answer is (a).

For purposes of computing EPS in consolidated financial statements (both basic and
diluted), if one or more less-than-wholly-owned subsidiaries are included in the
consolidated group, income from continuing operations and net income shall exclude
the income attributable to the non-controlling interest in subsidiaries.
Option (b) is incorrect because preferred stock dividends that an issuer has paid
or intends to pay in its own common shares shall be deducted from net income (or
added to the amount of a net loss) in computing income available to common
stockholders.
Option (c) is incorrect because basic EPS is calculated by dividing income

available to common stockholders (i.e. net income or loss attributable to the
parent entity adjusted for preferred stock dividends declared or accumulated) by
the weighted-average number of common shares outstanding. Options, warrants,
unvested share-based payment awards and convertible securities are excluded from
the basic EPS calculation.
Option (d) is incorrect because contingently issuable shares (i.e. shares issuable
for little or no cash consideration upon the satisfaction of certain conditions)
are included in basic EPS only if all the necessary conditions for the issuance of
such shares have been satisfied by the end of the period (e.g., the issuance of
shares is no longer contingent on any conditions except for the passage of time).
3
FAR516991
Company Alpha has 3,000,000 number of shares of common stock were outstanding as on
January 1, 20X1. On January 15, 20X1, 100,000 shares of common stock were issued
for cash. On March 1, 20X1, an additional 150,000 shares of common stock were
issued for cash. On March 16, 20X1, 120,000 treasury shares were repurchased in
market transactions. On June 30, 20X1, 400,000 shares of common stock were issued
for cash. What would be the weighted average number of shares of common stock
outstanding for calculation of EPS for the year ended December 31, 20X1 (assume
there are 365 days in the period)? Round your answer to the nearest dollar.
3,520,328
3,328,986
3,530,000
3,126,246
The correct answer is (b).

The weighted-average share calculation for the year ended December 31, 20X1 is as
follows (assuming there are 365 days in the period):
Particulars Amount (shares)

Shares of common stock outstanding on January1, 20X1 [i.e. 3,000,000 x (365 days
outstanding / 365 days in the period)]
3,000,000
Shares of common stock issued on January 15, 20X1 for cash [i.e. 100,000 x (351 /
365)] 96,164
Shares of common stock issued on March 1, 20X1 for cash [i.e. 150,000 x (306 /
365)] 125,753
Shares of common stock repurchased on March 16, 20X1 [i.e. 120,000 x (291 / 365)]
(95,671)
Shares of common stock issued on June 30, 20X1 for cash [i.e. 400,000 x (185 /
365)] 202,740
Weighted-average common shares outstanding for the year ended December 31, 20X1
3,328,986
Option (a) is incorrect because instead of subtracting repurchased shares, these

are being added in calculation of weighted average common shares outstanding (i.e.
3,520,328 = 3,000,000 + 96,164 + 125,753 + 95,671 + 202,740).
Option (c) is incorrect because it does not consider the weighted average of shares
issued or repurchased (i.e. 3,530,000 = 3,000,000 + 100,000 + 150,000 “ 120,000 +
$400,000).
Option (d) is incorrect because it does not consider the weighted average of
400,000 shares issued on June 30, 20X1 (i.e. 3,126,246 = 3,328,986 - 202,740).
4
FAR511274
During the current year, Comma Co. had outstanding: 25,000 shares of common stock,
8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are
$1,000 par and 9% convertible. The bonds were originally issued at par, and each
bond was convertible into 30 shares of common stock. During the year, net income
was $200,000, no dividends were declared, and the tax rate was 30%. What amount was
Comma's basic earnings per share for the current year?
$3.38
$7.36
$7.55
$8.00

Basic EPS = Income available to common shareholders/Weighted average number of
common shares outstanding.
Ref Summary Amount

a Net income $200,000
b Dividends preferred stock (8,000 shares x $20 Par) x 10% $16,000
c Net income available to common share holder (a-b) $184,000
d Weighted average number of common shares outstanding 25,000
e Basic EPS (c/d) $7.36
Comma Co. would report basic EPS for the current year at $7.36.
Option (a) and (c) are incorrect as per the above explanation.
Option (d) is incorrect because it does not deduct the dividends payable to
preferred shareholders at 10%. ($8 = $200,000/25,000 shares).
5
FAR517455
Following is the capital structure of Owen Corporation for the prior and the
current year:
200,000 shares of common stock issued and outstanding at 12/31/2XX1.
Issued additional 40,000 shares of common stock for cash on 7/1/2XX2.
Net income of $800,000 for the current year.
Owen also had 20,000 outstanding stock options which entitles the holders of the
options to purchase 20,000 common stock shares at $25 per share. These options were
exercised on 10/1/2XX2. The average market price of Owen/s stock was $50 during the
year. Calculate the number of shares used in computing diluted EPS for year ended
December 31, 2XX2.
200,000
230,000
240,000
30,000

Basic earnings per share (EPS) = Income (or earnings) available to common
shareholders / Weighted average number of commons shares outstanding.
In order to calculate the diluted earnings per share, numerator and denominator
need to be adjusted for dilution with respect to any convertible securities such
convertible securities, options / warrants.
In this question, the options have been exercised on 10/1/2XX2 for which 20,000
common shares were. However, for calculating the diluting earnings per share, it
will be assumed that the options have been exercised from the beginning the year.
The proceeds from the exercise of the options will be used to buy back common stock
(i.e., treasury stock method) at the average market price during the period.
Calculation of weighted average number of common shares outstanding for 2XX2.
Particulars Number of shares

1/1: 200,000 shares issued and outstanding 200,000
7/1: 40,000 additional shares of common stock issued,
(outstanding for six months) 20,000 (i.e. 40,000 x 6 / 12)
10/1: 20,000 shares issued on exercise of options (assumed to have been exercised
from the beginning) 20,000
Proceeds used to buy back shares at average market price (10,000) [i.e. 20,000 x
25 = $500,000 / $50]
Total weighted average number of common shares outstanding is 200,000 +20,000 +
10,000 = 230,000 shares.
Option (a) is incorrect because the shares outstanding at the beginning of the year
needs to be adjusted for changes to the common stock during the year as well as
incorporate the dilutive effect in case of a complex capital structure.
Option (c) is incorrect because the impact of treasury stock method has not been
provided.
Option (d) is incorrect because it is only the impact of the current year
transactions to the denominator.
6
FAR516997
Company XYZ has 200mn $20 shares in issue. The company also has 4mn $100
convertible bonds.
The bonds have an interest rate of 10%. Each bond is convertible into 10 shares and
the company has earning of $800mn for the period. Assuming the tax rate of 30% the
diluted earnings per share for company XYZ would be:
$3.45
$4.14
$4.00
$3.33

Diluted EPS is the second EPS measure required to be disclosed by ASC 260. For the
purpose of calculating diluted earnings per share, an undertaking shall adjust
profit and the weighted average number of shares outstanding, for the effects of
all dilutive potential shares. The dilutive effect of traditional convertible debt
and preferred stock is calculated using the “if-converted method”. For convertible
securities, the adjustments are made in the calculation:
Numerator- Earnings are increased by the dividends or after-tax interest expense

that would not have been due if the securities were converted to common stock at
beginning of the year.
Denominator- Shares are increased by the additional number of common shares that
would have been outstanding if the securities had been converted. The convertible
preferred stock or convertible debt is assumed to have been converted at the
beginning of the period or at the time of issuance, whichever is later. No weighing
is required.
Thus, in this case to calculate the diluted earnings per share:
Add back the cost of interest that was payable on the bonds. The amount is to be
calculate after tax = 4mn x $100 x 10% (1-30%) = 28mn.
The profit excluding the interest payment = $800mn +$28mn = $828mn.
2. Add the number of new shares that would be issued, if all bonds were
converted, to the current number of shares: 200mn + (4mn x 10 shares) = 240mn
shares and potential shares.
3. Divide the revised profit by the revised number of shares = $828mn /

240mnshares = $3.45 per share.
The bonds may be converted in the future. If they were converted today, earnings
per share would fall from $4.00 per share. Whilst earnings would rise, due to
interest not needing to be paid, the number of shares would rise steeply to achieve
this, leaving existing shareholders with less value than they currently enjoy.
Option (b) is incorrect because it does not consider the additional number of
shares in denominator that would been outstanding if the securities were converted
to common stock at beginning of the year (i.e. $828mn / 200mn shares = $4.14 per
share.
Option (c) is incorrect because that is the basic earnings per share (i.e.,
$800mn / 200mn shares = $4 per share).
Option (d) is incorrect because it does not add back the cost of interest that was
payable on the bonds to the earnings (i.e. $800mn / 240mn shares = $3.33 per
share).
7
FAR516998
West Co. had earnings per share of $15.00 for 20X3 before considering the effects
of any convertible securities. No conversion or exercise of convertible securities
occurred during 20X3. However, possible conversion of convertible bonds, not
considered common stock equivalents, would have reduced earnings per share by
$0.75. The effect of possible exercise of common stock options would have increased
earnings per share by $0.10. What amount should West report as diluted earnings per
share for 20X3?
$14.25
$14.35
$15.00
$15.10
Effect on EPS due to conversion of securities is reported only when it has a

dilutive effect. The impact of the conversion should dilute (lower) the earnings
per common share, also known as basic EPS. Anti-dilutive effect is when the impact
on conversion would increase the earnings per common share. Anti-dilutive effects
are ignored while reporting diluted EPS.
West has basic EPS of $15 for 20X3. Using the “If-converted method” convertible
bonds would have reduced the earnings per share by $0.75. This has a dilutive
effect on the basic EPS. Common stock options would have increased the EPS by
$0.10. This has an anti-dilutive effect on basic EPS and thus is ignored to
calculate diluted EPS.
Thus, diluted EPS = Basic EPS – effect on conversion of convertible bonds = $15 -
$0.75 = $14.25.
Option (b) is incorrect because $14.35 is calculated as Basic EPS – effect on

conversion of bonds + effect on conversion of stock option = $ 15 - $0.75 + $0.10 =
$14.35. This is incorrect because the effect on conversion of stock options of
$0.10 per share, being anti-dilutive should be ignored.
Option (c) is incorrect because $15 is the basic EPS. This does not give effect to
any dilutive effect on conversion of bonds or stock options. However, as explained
above, diluted EPS, giving effect to conversion of bonds would be $14.25.
Option (d) is incorrect because $15.10 is basic EPS + effect on conversion of stock
option = $15 + $0.10. However, here this conversion is anti-dilutive and thus
should be ignored to calculate diluted EPS. Instead the impact on conversion of
bonds that reduces the EPS by $0.75 should be given effect to.
8
FAR516916
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The
following events occurred during the year:
4/1 Issued 30,000 shares of common stock.

6/1 Issued 36,000 shares of common stock.
7/1 Declared a 5% stock dividend.
9/1 Purchased as treasury stock 35,000 shares of its common stock. Balm used the
cost method to account for the treasury stock.
What is Balm's weighted average of common stock outstanding at December 31?
131,000
139,008
150,675
162,342

To calculate the weighted average number of common stock outstanding, shares sold
to the public during the year must be prorated for the portion of the year they
were outstanding as the funds received from issuance are only available for
productive use by the corporation from that point on, not the entire year. Stock
dividends, stock splits are retroactively adjusted, as though they have been
outstanding and included at full amount for the current year, from the time of
issue. Treasury stock reduces shares outstanding, again has to be prorated for the
portion of the year they were repurchased.
Date
Particulars
No. of months outstanding
Calculation
Total outstanding
1/1
Outstanding 100,000 shares
12 months
100,000 x 12/12
100,000
4/1
Issued 30,000 shares of common stock
9 months
30,000 x 9/12
22,500
6/1
Issued 36,000 shares of common stock
7 months
36,000 x 7/12
21,000
7/1
Declared a 5% stock dividend (retroactively adjusted from the time of issue)
12 months for 5% of 100,000 shares, 9 months for 5% of 30,000 shares and 7 months
for 5% of 36,000 shares
5% (100,000 + 22,500 + 21,000)
7,175
9/1
Purchased as treasury stock 35,000 shares of its common stock
4 months
35,000 x 4/12
(11,667)
Weighted average common stock outstanding
139,008
The stock dividend is calculated as a percentage of the number of shares

outstanding as of the declaration date. Weighted average number of shares
outstanding = 100,000 + 22,500 + 21,000 + 7,175 – 11,667 = 139,008.
Option (a) is incorrect because the 5% stock dividend has been ignored and all
shares are taken as though they were outstanding for the whole year (i.e. 131,000 =
100,000 + 30,000 + 36,000 -35000).
Option (c) is incorrect because the treasury stock transaction on September 1 has
not been accounted for.
Option (d) is incorrect because the purchase of treasury shares has been added
rather than subtracted.
9
FAR516988
Select which of the statement is false for disclosure by a publicly-held company?
U.S. GAAP prohibits reporting an amount of cash flow per share.
U.S. GAAP allows the presentation of other comprehensive income or total

comprehensive income on per share basis.
An entity that reports a discontinued operation in a period shall present basic and
diluted per-share amounts for that line item either on the face of the statement of
income or in the notes to the financial statements.
EPS data shall be presented for all periods for which a statement of income or
summary of earnings is presented. If diluted EPS data are reported for at least one
period, they shall be reported for all periods presented.

Publicly held-companies are required to present basic EPS and dilutive EPS on the
face of the statement of income for:
Income from continuing operations {ON-TID-N}

Net income {ON-TID-N}
An entity that reports a discontinued operation in a period shall present basic and
diluted per-share amounts for that line item either on the face of the statement of
income or in the notes to the financial statements.
EPS data shall be presented for all periods for which a statement of income or
summary of earnings is presented. If diluted EPS data are reported for at least one
period, they shall be reported for all periods presented, even if they are the same
amounts as basic EPS. If basic and diluted EPS are the same amount, dual
presentation can be accomplished in one line on the statement of income.
ASC 260 prohibits presentation of other comprehensive income or total comprehensive
income on per share basis. It also prohibits reporting an amount of cash flow per
share.
Options (a), (b) and (d) are incorrect based on the above explanation.
10
FAR517000
The if-converted method of computing earnings per share data assumes conversion of
convertible securities as of the
Beginning of the earliest period reported (or at time of issuance, if later).
Beginning of the earliest period reported (regardless of time of issuance).
Middle of the earliest period reported (regardless of time of issuance).
Ending of the earliest period reported (regardless of time of issuance).

Under the “If-converted method” convertible securities are assumed to have been
converted at the beginning of the period or at the time of issuance, whichever is
later. “Anybody who could covert does so.” If the date of issue was prior to
current year, conversion effect is taken from beginning of current year. If
convertible securities were issued during the year, their impact to calculate
diluted EPS would be given effect from the date of issue. These securities did not
exist at the beginning of the period and cannot be converted as of that date.
Option (b) is incorrect because under the “If-converted method” convertible

securities are assumed to have been converted at the beginning of the period or at
the time of issuance, whichever is later. Earnings per share (EPS) is calculated
based on current year’s data. The calculation is given effect from beginning of
current year and not beginning of earliest period reported. Moreover, if
convertible securities were issued during the year, their impact to calculate
diluted EPS would be given effect from the date of issue. These securities did not
exist at the beginning of the period and cannot be converted as of that date.
Option (c) is incorrect because under the “If-converted method” convertible

the time of issuance, whichever is later. EPS is calculated based on current year’s
data. The calculation is given effect from beginning of current year and not middle
of earliest period reported. Moreover, if convertible securities were issued during
the year, their impact to calculate diluted EPS would be given effect from the date
of issue. These securities did not exist at the beginning of the period and cannot
be converted as of that date.
Option (d) is incorrect because under the “If-converted method” convertible

the time of issuance, whichever is later. EPS is calculated based on current year’s
data. The calculation is given effect from beginning of current year and not end of
earliest period reported. Moreover, if convertible securities were issued during
the year, their impact to calculate diluted EPS would be given effect from the date
of issue. These securities did not exist at the beginning of the period and cannot
be converted as of that date.
11
FAR511702
Coffee Co. had the following information related to common and preferred shares
during the year:
Common shares outstanding. 1/1 700,000

Common shares repurchased. 3/31 20,000
Conversion of preferred shares. 6/30 40,000
Common shares repurchased. 12/1 36,000
Coffee reported net income of $2,000,000 at December 31. What amount of shares
should Coffee use as the denominator in the computation of basic earnings per
share?
684,000
700,000
702,000
740,000
The correct answer is (c).

To calculate the basic earnings per share, the weighted average number of shares of
common stock outstanding is used as denominator. The shares sold must be prorated
for the portion of the year they were outstanding. Treasury stocks are reported as
contra shares to equity which would be deducted from the common stock, for the
number of months T/S was outstanding. The calculation is as follows:
Ref Common Stock Outstanding Total Number Weighted Shares

o/s Shares o/s
a Common shares outstanding, 1/1 = (700,000 C/S) x (12/12)
700,000
b Common shares repurchased, 3/31 = (20,000 T/S) x (9/12) 15,000
c Conversion of perferred shares, 6/30 = (40,000 P/S ) x (6/12) 20,000
d Common shares repurchased, 12/1 = (36,000 T/S) x (1/12) 3,000
e Weighted average no. of shares outstanding (a-b+c-d)
702,000
Coffee Co. would use shares outstanding at 702,000.
Option (a) is incorrect because it does not calculate the outstanding number of
shares on weighted average basis. (684,000 = 700,000 C/S - 20,000 T/S + 40,000 C/S
- 36,000 T/S).
Option (b) is incorrect because it does not consider the share repurchases which
would be deducted from common shares o/s on prorated basis and preferred shares
converted during the year should be included for the number of months P/S was
outstanding.
Option (d) is incorrect because it does not include the share repurchases which
would be deducted from common shares o/s on prorated basis and preferred shares
converted during the year should be included for the number of months P/S was
outstanding. (740,000 = 700,000 C/S + 40,000 P/S).
12
FAR511354
Prompt Co. is calculating earnings per share amounts for inclusion in the annual
report to shareholders. Prompt has obtained the following information from the
controller's office as well as shareholder services:
Net Income from January 1 to December 31 $110,000

Corporate income tax rate is 30 %
Number of outstanding shares:
January 1 to April 30 12,000

May 1 to July 31 10,000
August 1 to December 31 12,000
In addition, Prompt has $1,000,000 face value 10-year convertible bonds outstanding
on January 1. The bonds were issued three years ago at a discount, which is being
amortized in the amount of $7,000 per year. The stated rate of interest on the
bonds is 8%, and the bonds were issued to yield 9%. Each $1,000 bond is
convertible to 30 shares of Prompt's stock.
Assuming the bonds are antidilutive securities, what amount is Prompt's diluted
earnings per share for the year ended December 31?
$9.57
$14.86
$7.53
$17.13

Prompt Co., has 10 years convertible bonds outstanding. These bonds are anti-
dilutive securities and not included in the diluted EPS. Therefore the Co.'s
diluted earnings per share will be the same as basic earnings per share.
Basic/Diluted EPS = Income Available to common shareholders/Weighted average number
of common shares outstanding.
Ref Common stock outstanding Total number of weighted shares O/S

Shares outstanding
a January 1 to April 30 =(12,000 c/s) x (4/12) 4,000
b May 1 to July 31 =(10,000 c/s) x (3/12) 2,500
c August 1 to December 31 =(12,000 c/s) x (5/12) 5,000
d Weighted Average Number of shares outstanding (a+b+c) 11,500
e Net income $110,000
f Diluted/Basic earning per share (e/d) $9.57
Option (b), (c) and (d) are incorrect as per the above explanation.
13
FAR517230
A CPA candidate asked his instructor whether there will be any impact of
declaration of cash, stock dividend and stock split on the calculation of earnings
per share. As an instructor, help the CPA candidate to crack the question.
Stock Dividend Stock split Cash dividends
No Yes No
No No Yes
Yes Yes No
Yes No No
Earnings per share (EPS) = (Income available to common shareholders) / (Weighted
average number of common shares outstanding).
Income available to the stockholders = Net income - (Cumulative preference

dividend) – (Declared non-cumulative preference dividend).
Stock dividends are additional stocks issued to existing common stockholders with
no distribution of entity’s cash / assets and no addition to stockholder’s
interests. The accounting entry is recorded to transfer from retained earnings to
common stock and additional paid in capital, if any.
Stock splits are issued in exchange for old stock so as to increase number of
outstanding stocks (and reduce market value per stock to enable wider
distribution); accounted for by adjusting par value of the new stock for the split
by a memorandum entry.
As declaration of both stock dividends and stock splits would lead to the change in
the average number of common shares outstanding (denominator), the calculation of
basic EPS would get affected.
However, cash dividends do not impact the calculation of EPS as such dividends are
not deducted from net income available to common stock holders. These impact
neither the numerator nor the denominator of the EPS calculations.
14
FAR516854
A company had 400,000 shares of common stock issued and outstanding on January 1,
year 1, and had the following equity transactions for year 1:
Transactions
Date
Issued 200,000 new shares for cash April 1
Issued new shares as a result of a 3-for-1 stock split July 1
Purchased 300,000 shares treasury stock for cash October 1
What should the company use as the denominator for the calculation of basic
earnings per share for year ended December 31, year 1?
1,650,000
1,575,000
1,325,000
1,075,000

The denominator is the weighted average number of common shares. Shares sold to the
public during the year must be prorated for the portion of the year they were
outstanding as the funds received from issuance are only available for productive
use by the corporation from that point on, not the entire year. Stock dividends,
stock splits are retroactively adjusted, as though they have been outstanding and
included at full amount for the current year, from the time of issue. Treasury
stock reduces shares outstanding, again has to be prorated for the portion of the
year they were repurchased.
Date
Particulars
No. of months outstanding
Calculation
Total outstanding
1/1
Outstanding 400,000 shares
12 months
400,000 x 12 / 12
400,000
4/1
Issued 200,000 new shares for cash
9 months
200,000 x 9 / 12
150,000
7/1
Issued new shares as a result of a 3 for 1 stock split (retroactively adjusted from
the time of issue)
12 months for 400,000 shares x 2 and 9 months for 200,000 shares x 2
(400,000 x 2) + (150,000 x 2)
1,100,000
10/1
Purchased as treasury stock 300,000
3 months
300,000 x 3 / 12
(75,000)
Weighted average common stock outstanding
15,75,000
Weighted average number of shares outstanding = 16,50,000 – 75,000 = 15,75,000.
Option (a) is incorrect because the purchase of 300,000 shares treasury stock for
cash on October 1 has not been accounted for.
Options (c) and (d) are incorrect due to improper calculations.
15
FAR517443
Would there be any effect on basic earnings per share or diluted earnings per share
due to dilution from contingently issuable stock considering all the conditions for
issuance are met?
Basic earnings per share Diluted earnings per share
Yes Yes
No No
Yes No
No Yes
Contingent stock is stock issuable for little or no cash consideration upon the
satisfaction of certain conditions pursuant to a contingent stock agreement
(usually associated with business combinations).
If all necessary conditions have been satisfied (i.e. issuance of stocks is no

longer contingent), such contingent stock is included in the denominator of
calculation for basic earnings per share as well as diluted earnings per share.
Do note that if the conditions for issuance are not met by the end of the period,
contingent shares that would be issuable if the end of the reporting period were
the end of the contingency period are only included in the calculation of diluted
earnings per share. These contingently issuable stocks shall be included as of the
beginning of the period (or date of contingent stock agreement, if later)
Options (b), (c) and (d) are incorrect based on the above explanation.
16
FAR511283
Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value
cumulative preferred stock. No dividends on common stock were declared during the
year. Net income was $2,000,000. What was Jen's basic earnings per share?
$9.00
$9.09
$10.00
$11.11

Ref Summary Amount

a Net income $2,000,000
b Dividends preferred stock (20,000 shares x $100 Par) x 10 %$200,000
c Net income available to common share holder (a-b) $1,800,000
d Weighted average number of common shares outstanding 200,000
e Basic EPS (c/d) $9.00
Jen Co. would report basic EPS for the current year at $9.
Option (b) is incorrect because it does not deduct the dividends payable to
preferred shareholders at 10% and adds the preferred shares O/S to common shares.
[$9.09 = $2,000,000/(200,000 C/S + 20,000 P/S)].
Option (c) is incorrect because it does not deduct the dividends payable to
preferred shareholders at 10%. ($10 = $2,000,000/200,000 shares).
Option (d) is incorrect because it does not deduct the dividends payable to
preferred shareholders at 10% and deducts the preferred shares o/s from common
shares. [$11.11 = $2,000,000/(200,000 C/S - 20,000 P/S)].
17
FAR517711
MCL Corp.’s net income is $235,000 and has 10,000 outstanding common stock shares.
It has 1,000 outstanding preferred shares of 10%, $100 par, 8% bond issued at par
last year for $300,000 with face value of $1,000 —each bond is convertible to 100
shares of common stock. Calculate the diluted EPS assuming the tax rate is 40% and
the debt is converted into shares at the end of the year.
$5.63
$6.24
$5.99
$2.39

Preferred dividends = 1,000 × $10 = $10,000.
Number of shares from debt conversion = 300 × 100 = 30,000.
If the convertible debt is converted to common stock at the beginning of the year,
there would be no interest expense related to the convertible debt. Thus, we have
to adjust the after-tax net income for the after-tax effect of the decrease in
interest expense.
Interest expense before tax would be 8% of $300,000 = $24,000. Interest expense
after tax would be $24,000 x 60% = $14,400.
Diluted EPS = [Net income – Preferred dividends + interest expense saved net of
tax/ (Number of outstanding shares + Convertible debt shares) = ($235,000 – $10,000
+ $14,400) / (10,000 + 30,000) = $5.99.
Note: When there are preference shares, cumulative or not, they have a preference
over the equity shares. Therefore, unless there is an explicit statement saying
there are no dividends declared, you assume they get their dividends. In fact,
preference shareholders are entitled to dividend unless otherwise declared in the
meetings. If cumulative, then even if the question mentions that dividends are not
declared the dividends would still be subtracted which would not be done for non
cumulative. But if the question is silent then we take it that dividends are
declared. Preference shares get preference, so when there is a positive income,
they will get dividends usually, unless otherwise specifically mentioned.
Option (a) is incorrect because this represents omitting the convertible interest
from the numerator of the diluted EPS formula (i.e. $5.63 = $225,000 / 40,000).
Option (b) is incorrect because this represents omitting the preferred dividend
from the numerator of the diluted EPS formula (i.e. $6.24 = $249,400 / 40,000).
Option (c) is incorrect because this represents omitting the convertible shares
from the denominator of the diluted EPS formula (i.e. $2.39 = $239,400 / 10,000)
18
FAR517234
The basic earnings per share have been calculated. What would be the adjustment of
the following on the numerator and denominator while calculating diluted earnings
per share?
Non-convertible cumulative preferred stock Convertible bonds
Numerator Denominator Numerator Denominator
No change No change Increase Increase
Increase Increase Increase Increase
No change Increase Decrease Increase

Decrease Increase Increase Increase
Calculating diluted EPS (if convertible preferred stock outstanding with dilutive
effect):
Numerator – Add back preferred dividends applicable to convertible preferred stock

(as these were deducted to compute income available to common stockholders).
Denominator – Increase as if convertible preferred stock had been converted at the

beginning of the period (or at the time of issuance, if later).
For non-convertible preference stock, there would be no change.
Calculating diluted EPS (if convertible bonds outstanding with dilutive effect):
Numerator – Add back interest on convertible debt (as these were deducted to
compute net income (after making adjustments for:
Non-discretionary adjustments (e.g. profit-sharing and royalty agreements) – may

have been computed differently if interest on convertible debt had not been
expensed.
Income tax effects – as interest is tax-deductible; also, need to consider tax
effects of non-discretionary adjustments.
Denominator – Increase as if convertible debt had been converted at the beginning
of the period (or at the time of issuance, if later).
Thus, if the preferred stock is non-convertible, there would be no change while

computing diluted earnings per share as compared to the calculated basic earnings
per share. However, both numerator and denominator would increase in case of
convertible bonds.
19
FAR511329
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the
following securities would be dilutive?
Cumulative 8%, $50 par preferred stock.
Ten percent convertible bonds, issued at par, with each $1,000 bond convertible
into 20 shares of common stock.
Seven percent convertible bonds, issued at par, with each $1,000 bond convertible
into 40 shares of common stock.
Six percent, $100 par cumulative convertible preferred stock, issued at par, with
each preferred share convertible into four shares of common stock.

If the 7% convertible bonds are converted with each $1,000 bond into 40 shares of
common stock. Numerator is increased by the after tax interest expense and the
denominator by number of shares, if the bond is converted. After tax interest = $49
[$1,000 x 7% x (1-0.3)]. Effect of converting each bond into 40 shares would be
$1.225 ($49/40 Shares) per share which is less than $1.29 per share, resulting in
dilution of basic EPS of $1.29.
Option (a) is incorrect because preferred stock is not convertible and would not
have a dilutive effect.
Option (b) is incorrect because if the 10% bonds were converted, it will be $3.5
per share [($100-$30)/20], which would not dilute the EPS.
Option (d) is incorrect because the effect of conversion will be $1.5 per share
[($100 x 6%)/4], which would not dilute the EPS.
20
FAR516999
If a company has high interest bonds, which would be antidilutive if converted,

these will be included in:
Basic earnings per share calculation.
Dilutive earnings per share.
Both (a) and (b).
Neither.

If the calculation of dilutive EPS results in an EPS number which is higher than
the basic EPS number, then the security is anti-dilutive and not included in the
reported diluted EPS. Thus, if a company has high interest bonds, which would be
antidilutive if converted should neither be included in calculation of basic EPS,
nor in the calculation of dilutive EPS.
Options (a), (b) and (c) are incorrect based on the above explanation.
21
FAR516878
A company reported net income available to common stockholders of $2,000,000 for

the year ended December 31, year 2. The company had 1,500,000 shares of common
stock outstanding as of January 1, year 2, and issued 500,000 additional shares of
common stock on May 1, year 2. What amount is the company's basic earnings per
share for the year ended December 31, year 2?
$1.00
$1.09
$1.20
$1.33
Income available to common shareholders = $2,000,000.
Calculation of weighted average number of common shares:-
The common shares issued on May 1 will be appropriated for 8 months: 500,000 x 8 /
12 = 333,333 shares.
Weighted average number of shares outstanding = 1,500,000 + 333,333 = 1,833,333.
Basic EPS = $2,000,000 / 1,833,333 = $1.09.
Option (a) is incorrect because the new issue on May 1 has to be prorated as
outstanding for 8 months of the year.
Option (c) is incorrect is incorrect due to inaccurate calculation.
Option (d) is incorrect because the new issue on May 1 is ignored in calculating
the average number of shares.
22
FAR511241
The following information is relevant to the computation of Chan Co.'s earnings per
share to be disclosed on Chan's income statement for the year ending December 31:
Net income for 20X2 is $600,000.$5,000,000 face value 10-year convertible bonds
outstanding on January 1. The bonds were issued four years ago at a discount which
is being amortized in the amount of $20,000 per year. The stated rate of interest
on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is
convertible into 20 shares of Chan's common stock. Chan's corporate income tax rate
is 25%.Chan has no preferred stock outstanding, and no other convertible
securities. What amount should be used as the numerator in the fraction used to
compute Chan's diluted earnings per share assuming that the bonds are dilutive
securities?
$130,000
$247,500
$952,500
$1,070,000

For convertible securities, use "If-converted method"- the calculation of diluted
earnings per share (EPS) (assume anyone who "could convert" does so) for a company
with convertible preferred stock or convertible bonds starts with basic EPS. For
numerator, earnings are increased by the dividends or after tax interest expense
that would not have been due if the securities were converted to common stock at
beginning of the year, which would be $952,500 ($352,500 + $600,000).
Ref Summary Amount

a Convertible bonds Face Value $5,000,000
b Stated interest rate 9%
c Annual Interest paid on bonds (a x b) $450,000
d Amortization of discount on bonds $20,000
e Interest expense (c+d) $470,000
f Corporate income tax rate 25%
g After tax interest expense {e x (1-0.25)} $352,500
h Net income in year 20X2 $600,000
I Numerator for dilutive EPS (g+h) $952,500
Option (a) is incorrect because the interest expense is deducted from net income,
instead of adding it to NI and after tax expense impact is not considered.
[$130,000 = $600,000 - $470,000].
Option (b) is incorrect because the interest expense is deducted from net income,
instead of adding it to NI. {$247,500 = $600,000 - [$470,000 x (1- 25%)]}.
Option (d) is incorrect because the interest expense should be added after tax to
NI. [$1,070,000 = $600,000 + $470,000].
23
FAR511356
The senior accountant for Carlton Co., a public company with a complex capital
structure, has just finished preparing Carlton's income statement for the current
fiscal year. While reviewing the income statement, Carlton's finance director
noticed that the earnings per share data has been omitted. What changes will have
to be made to Carlton's income statement as a result of the omission of the
earnings per share data?
No changes will have to be made to Carlton's income statement. The income statement
is complete without the earnings per share data.
Carlton's income statement will have to be revised to include the earnings per
share data.
Carlton's income statement will only have to be revised to include the earnings per
share data if Carlton's market capitalization is greater than $5,000,000.
Carlton's income statement will only have to be revised to include the earnings per
share data if Carlton's net income for the past two years was greater than
$5,000,000.

Publicly-held companies are required to present basic EPS and dilutive EPS on the
face of the income statement for:
Income from continuing operations {ON-TID-N}.
Net income {ON-TID-N}.
Option (a), (c) and (d) are incorrect because EPS data is an integral part of the
presentation of financial statements for the publicly-held companies.
24
FAR516990
Company Alpha has 3,000,000 number of shares of common stock were outstanding as on
January 1, 20X1. On January 15, 20X1, 100,000 shares of common stock were issued
for cash. On March 1, 20X1, an additional 150,000 shares of common stock were
issued for cash. On March 16, 20X1, 120,000 treasury shares were repurchased in
market transactions.
What would be the weighted average number of shares of common stock outstanding
for calculation of EPS for the first quarter ended March 31, 20X1 (assume there are
90 days in the period)?
3,136,111 shares.
3,000,000 shares.
3,114,778 shares.
3,130,000 shares.

The weighted-average number of shares is an arithmetical mean average of shares
outstanding and assumed to be outstanding for EPS computations. The most precise
average would be the sum of the shares determined on a daily basis divided by the
number of days in the period.
Shares sold to the public during the year must be prorated for the portion of the
year they were outstanding as the funds received from issuance are only available
for productive use by the corporation from that point on, not the entire year.
The weighted-average share calculation for the first quarter ended March 31, 20X1
follows (assuming there are 90 days in the period):
Particulars Amount (shares)

Shares of common stock outstanding on January 1, 20X1 [i.e. 3,000,000 x (90 days
outstanding / 90 days in the period)]
3,000,000
Shares of common stock issued on January 15, 20X1 for cash [i.e. 100,000 x (76 /
90)] 84,444
Shares of common stock issued on March 1, 20X1 for cash [i.e. 150,000 x (31 / 90)]
51,667
Shares of common stock repurchased on March 16, 20X1 [i.e. 120,000 x (16 / 90)]
(21,333)
Weighted-average common shares outstanding for the first quarter ended March 31,
20X1 3,114,778
Option (a) is incorrect because it does not subtract the weighted average of common
stock repurchased on March 16, 20X1.
Option (b) is incorrect because it does not consider the shares issued or
repurchased during the year.
Option (d) is incorrect because it does not consider the weighted average of shares
issued or repurchased during the year.
25
FAR517127
On June 30, year 1, Regal, Inc. issued forty $5,000, 8% bonds at par. Each bond was
convertible into 100 shares of common stock. On January 1, year 2, 10,000 shares of
common stock were outstanding. The bondholders converted all the bonds on July 1,
year 2. The following amounts were reported in Regal’s statement of income for the
year ended December 31, year 2:
Revenues $950,000
Operating expenses 882,000
Interest on bonds 8,000
Income before income tax 60,000
Income tax at 30% 18,000
Net income 42,000
What is Regal’s basic and diluted earnings per share? Is the security anti-
dilutive?
Basic EPS ($). Diluted EPS ($). Anti-dilutive?
4.2 3.4 No
3.5 3.4 No
3.0 3.57 Yes
4.2 3.97 No
Basic earnings per share (EPS) =
Income (or earnings) available to common shareholders

Weighted average number of common shares outstanding
Income available to common shareholders = $42,000.
Number of shares converted from bonds = 4,000 shares (i.e. 40 bonds, each bond
converted to 100 shares).
Weighted average number of common shares outstanding = Common shares outstanding at

the beginning of the year 10,000 + shares that were converted from bonds at the
middle of the year 2,000 (i.e. time-weighted:- 4,000 shares but for 6 months only)
= 12,000.
Basic EPS = $42,000 / 12,000 = $3.5.
Diluted EPS on conversion of bond is calculated as:
Net income + Interest expense net of tax

Weighted average common shares + Additional shares if converted
Diluted earnings per share (EPS) is calculated using “If-converted method” for
convertible securities where conversion of bonds is assumed to be done at the
beginning of the year (irrespective of when they were actually done). The total
number of shares outstanding would be the 10,000 shares already outstanding plus
the shares that are assumed to be converted at the beginning of the year = 4,000
shares (i.e. 40 bonds, each bond converted to 100 shares), a total of 14,000
shares. The shares are assumed to be converted at the beginning of the year they do
not have to be time weighted and all the shares are deemed outstanding.
Interest expense, net of tax would be added back to net income of $42,000 as, if
all the bonds were converted to securities, there would be no interest income.
Thus, the net income will increase by the interest amount net of tax = $42,000 +
($8,000 x (1 – 30%)) = $42,000 + $5,600 = $47,600. Diluted EPS = $47,600 / 14,000 =
$3.4
If the calculation of diluted EPS results in an EPS number which is greater than
the basic EPS number, then the security is anti-dilutive and is not included in the
reported diluted EPS. Basic EPS is greater than the diluted EPS, the security is
not anti-dilutive.
Option (a) is incorrect because it calculates basic EPS only on the total number of
shares outstanding at the beginning of the year which is 10,000. The converted
shares are not considered. Shares converted on July must be time-weighted. The
diluted EPS calculation is correct.
Option (c) is incorrect because this calculates basic EPS by dividing the entire
14,000 shares instead of time-weighting. Diluted EPS is also incorrect because this
calculates diluted EPS by adding the entire interest of $8,000 and does not
consider it net of tax. If the calculation of diluted EPS results in an EPS number
which is greater than the basic EPS number, then the security is anti-dilutive and
is not included in the reported diluted EPS.
Option (d) is incorrect because it calculates basic EPS only on the total number of
shares outstanding at the beginning of the year which is 10,000. The converted
shares are not considered. Shares converted on July must be time-weighted. Diluted
EPS is also incorrect because this calculates the diluted EPS by taking the
weighted average number of shares, time weighting the newly converted shares for 6
months thereby taking 10,000 + 2,000 shares. This is incorrect because the if-
converted method assumes all shares are converted at the beginning of the year
itself and the number of shares should be 14,000.
26
FAR516989
Net income/loss for companies X, Y and Z are as follows:
Company Net income / loss ($)

X 1,100,000
Y 250,000
Z (500,000)
Companies X, Y and Z each have 2,000,000 shares of non-redeemable preferred stock
outstanding. The dividends rate on the preferred stock is $0.15 per share. For
company X, the preferred stock dividend is non-cumulative. For company Y, the
dividend is cumulative and there are no dividends in arrears. For company Z,
dividends are cumulative only to the extent net income equals or exceeds the
dividend requirement (i.e. $450,000) in the current year. Company X declared a
preferred dividend. Companies Y and Z did not declare dividends on their preferred
stock.
Select the correct option for income (loss) attributable to common stockholders of
companies X, Y and Z respectively.
Company X - 800,000; Company Y - (50,000); Company Z - (500,000).
Company X- 1,100,000; Company Y - 250,000; Company Z - (500,000).
Company X - 1,100,000; Company Y - (50,000); Company Z - (800,000).
Company X - 800,000; Company Y - (50,000); Company Z - (800,000).

Income available to common stockholders is computed by deducting dividends declared
on preferred stock and dividends accumulated on cumulative preferred stock from
income (loss) from continuing operations and net income (loss).
If the preferred stock is not cumulative, only dividends actually declared during
the year are subtracted.
If the preferred shares are cumulative, the annual dividend preference is
subtracted each year, regardless of whether or not it is declared or paid, as the
amounts not paid accumulate and will never be payable to common shareholders.
Company X’s earnings must be reduced by dividends payable to shareholders as the
dividend has been declared.
Similarly for company Y also earnings must be reduced by dividends accumulated
though not declared. If the preferred shares are cumulative, the annual dividend
preference is subtracted each year, regardless of whether or not it is declared or
paid.
Because company Z incurred a net loss, the dividend is not cumulative under the
preferred stock’s terms and, accordingly, is not deducted from net loss for EPS
calculation purpose.
Refer to the following table for calculation of income available to common
stockholders:
Company Net income / loss ($) Less preferred stock dividends ($) Income
(loss) attributable to common stockholders ($)
X 1,100,000 300,000 800,000
Y 250,000 300,000 (50,000)
Z (500,000) - (500,000)
Additional note: If company X or Y had income (loss) from discontinued operations,
the preferred stock dividends also would be deducted from income (loss) from
continuing operations to compute EPS from continuing operations, even if doing so
resulted in a loss from continuing operations.
27
FAR517231
Following is the capital structure of Owen Corporation for the prior and the
current year:
200,000 shares of common stock issued and outstanding at 12/31/2XX1
Issued additional 40,000 shares of common stock for cash on 7/1/2XX2

Net income of $800,000 for the current year.
Owen also had 20,000 outstanding stock options which entitles the holders of the
options to purchase 20,000 common stock shares at $25 per share. The average market
price of Owen’s stock was $50 during the year. Calculate the number of shares used
in computing diluted EPS for year ended December 31, 2XX2.
200,000
240,000
230,000
10,000

Basic earnings per share (EPS) = (Income (or earnings) available to common
shareholders) / (Weighted average number of commons shares outstanding).
In order to calculate the diluted earnings per share, we need to adjust the
numerator and denominator for dilution with respect to any convertible securities
such as convertible debt or stock options / warrants. Stock options / warrants are
added to the denominator using the treasury method by assuming that the options /
warrants are exercised and use the proceeds to buy back as treasury stock at
average current market price.
Calculation of weighted average number of common shares outstanding for 2XX2:
1/1: 200,000 shares issued and outstanding

200,000 (i)
7/1: 40,000 additional shares of common stock issued

20,000 (ii)
[outstanding for six months - (40,000 x 6 / 12)]
Shares assumed to be issued on exercise of options 20,000
Less: Shares assumed to be acquired using treasury method
Proceeds from stock options $500,000
(Assuming they are exercised- 20,000 x $25)
Average price of stock $50
Shares assumed to be reacquired

(10,000)
Incremental number of shares outstanding

10,000 (iii)
(using treasury stock method)
Thus, total weighted average number of common shares outstanding is: (i) + (ii) +
(iii) = 200,000 + 20,000 + 10,000 = 230,000.
Option (a) is incorrect because the shares outstanding at the beginning of the year
needs to be adjusted for changes to the common stock during the year as well as
incorporate the dilutive effect in case of a complex capital structure.
Option (b) is incorrect because to consider the impact of convertible stock

options, the increase in denominator by the number of shares due to exercise of
options should be decreased by the number of shares that can be bought back at the
average market price [i.e. point (iii) as per above].
Option (d) is incorrect because it is only the adjustment to the denominator and
not the denominator to calculate diluted EPS.
28
FAR516528
Ute Co. had the following capital structure during 20X2 and 20X3:
Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding
$250,000
Common stock, $5 par, 200,000 shares issued and outstanding$1,000,000
Preferred stock is not considered a common stock equivalent. Ute reported net
income of $500,000 for the year ended December 31, 20X3. Ute paid no preferred
dividends during 20X2 and paid $16,000 in preferred dividends during 20X3. In its
December 31, 20X3 income statement, what amount should Ute report as basic earnings
per share?
$2.42
$2.45
$2.48
$2.50
Income available to common shareholders = Net income - Preferred stock dividend. If

the preferred stock is cumulative, the annual dividend preference is subtracted
each year, regardless of whether declared or not. The income available to common
shareholders for December 31, 20X3 = Net income for 20X3 - Dividend payable to
preference shareholders for the year (i.e. $250,000 x 4%) = $500,000 - $10,000 =
$490,000. This is divided by the 200,000 shares of common stock outstanding this
year. Basic EPS= $490,000 / 200,000= $2.45.
Note: It does not matter if there are dividends in arrears from earlier years,
since those amounts would have been subtracted in determining EPS of those earlier
years, and would not be subtracted again this year.
Options (a) and (c) are incorrect because the $16,000 actually paid as dividends
have no bearing in the income available calculation. Income available to common
shareholders = Net income - cumulative dividends attributable to this year for
preference shareholders, irrespective of any amounts paid.
Option (d) is incorrect because for cumulative preference shares, the cumulative
dividends attributable to this year for the preference shareholders have to be
deducted from the net income for basic EPS calculation.
29
FAR511703
Based on the stock transactions below, what is the weighted average number of
shares outstanding as of December 31, year 1, that should be used in the
calculation of basic earnings per share in financial statements issued on March 1,
year 2?
Date Transactions
January 1, year 1 Beginning balance 100,000
April 1, year 1 Issued 30,000 shares for cash
June 1, year 1 50% stock dividend
February 15, year 2 2 for 1 stock split
March 15, year 2 Issued 40,000 shares for cash
147,500
183,750
295,000
367,500

The weighted average number of shares of common stock outstanding is used as
denominator. The shares sold must be prorated for the portion of the year they were
outstanding. Since the financial statements for Year 1 are being issued on March 1
Year 2, after the 2 for 1 stock split on February 15 of Year 2, the split will be
treated as if it had occurred at the beginning of the earliest period presented
which is Year 1.
Calculation of basic EPS would use 367,500 weighted average number of shares
outstanding for Year 1.
Ref Common Stock Outstanding

Total Number Weighted Shares O/S
Shares Outstanding
a Beginning balance year 100,000 C/S 100,000
b Issued 30,000 shares for cash, Apr 1, Year 1 = (30,000 C/S) x (9/12) 22,500
c Shares outstanding before stock split (a+b)
122,500
d 50% Stock dividend, Jun 1, Year 1 = 122,500 x 150% 183,750
e 2 for 1 stock split Feb 15, Year 2 = (183,750 C/S) x 2 367,500
Option (a), (b) and (c) are incorrect because the weighted average number of common
stock for the portion of the year outstanding has to be calculated. The stock split
and the stock dividend should to be considered for the financial year.
30
FAR517229
Under US GAAP, earnings per share should be reported for:
Discontinued operations Income from continuing operations Net income
Yes Yes Yes
Yes Yes No
No No Yes
No Yes Yes
Earnings per share (EPS) refers to the amount of earnings attributable to each
share of common stock. Publicly-held companies required to present basic EPS and
dilutive EPS on:
Face of the statement of income for:

Income from continuing operations (ON-TID-N).
Net income (ON-TID-N).
Either the face of statement of income or in notes to the financial statements for:
Discontinued operations (ON-TID-N).
31
FAR516996
On June 30, 20X8, Lomond, Inc. issued twenty $10,000, 7% bonds at par. Each bond
was convertible into 200 shares of common stock. On January 1, 20X9, 10,000 shares
of common stock were outstanding. The bondholders converted all the bonds on July
1, 20X9. The following amounts were reported in Lomond’s income statement for the
year ended December 31, 20X9:
Revenues $977,000
Operating expenses 920,000
Interest on bonds 7,000
Income before income tax 50,000
Income tax at 30% 15,000
Net income 35,000
What is Lomond’s 20X9 diluted earnings per share?
$2.50
$2.85
$2.92
$3.50
Diluted earnings per share (EPS) is calculated using “If-converted method” for
convertible securities where conversion of bonds is assumed to be done at the
beginning of the year (irrespective of when they were actually done). Interest
expense, net of tax would be added back to net income of $35,000 as, if all the
bonds were converted to securities, there would be no interest income. This
amounts to $4,900 [Interest expense $7,000 x (1 - tax rate) = $7,000 x (1 - 30%) =
$4,900]. The net income would be $35,000 + $4,900 = $39,900.
If the conversion had taken place, additional shares that would have been issued is
200 common shares for each bond. Total common shares to be issued = 20 bonds x 200
shares = 4,000 shares. This potential conversion issue is added to the weighted
average common shares outstanding. 4,000 shares are added to the 10,000 shares
already outstanding. The total shares is 14,000.
Option (a) is incorrect because $2.5 is calculated as net income of $35,000 divided
by 14,000 shares. While number of shares have been adjusted for impact on
conversion, net income should be increased for interest expense saved on account of
conversion. As explained above, this would be $4,900.
Option (c) is incorrect because this calculates the basic EPS and not the diluted
EPS. Basic EPS is equal to the income available to common shareholders / weighted
average number of common shares outstanding. All the bonds were converted to 4,000
shares on July 1, 20X9, the weighted average number of common shares outstanding is
equal to the 10,000 shares outstanding for the full year + 2,000 shares that were
converted at the middle of the year (time-weighted:- 4,000 shares but for 6 months
only) = 12,000 shares. The basic EPS = $35,000 / 12,000 = $2.92.
Option (d) is incorrect because $3.5 is calculated by dividing net income of

$35,000 by number of shares of 10,000. This does not adjust the net income for
amount saved on interest, nor does it adjust the number of shares for the bonds
that have been converted.
32
FAR517001
In determining earnings per share, interest expense, net of applicable income

taxes, on convertible debt that is dilutive should be
Added back to weighted-average common shares outstanding for diluted earnings per
share.
Added back to net income for diluted earnings per share.
Deducted from net income for diluted earnings per share.
Deducted from weighted-average common shares outstanding for diluted earnings per
share.
In determining diluted EPS, “if-converted method” is used to determine the impact

of conversion of convertible debt. Convertible securities are assumed to have been
converted at the beginning of the period or at the time of issuance, whichever is
later. Had the conversion taken place, interest expense would not have been
incurred. Net income needs to be increased by adding back interest expense net of
tax.
Option (a) is incorrect because interest expense, net of tax is not added back to
weighted-average common shares outstanding for diluted EPS. The number of shares
issuable on conversion of debt is added to weighted-average common shares
outstanding.
Option (c) is incorrect because interest expense, net of tax is added to net income
and not reduced to calculate diluted EPS.
Option (d) is incorrect because weighted average number of common shares is

increased by the number of shares issuable on conversion of debt. It is not
increased by the interest expense saved (net of tax) due to conversion of debt.
33
FAR511314
The following information pertains to Ceil Co., a company whose common stock trades
in a public market:
Shares outstanding at 1/1 100,000

Stock dividend at 3/31 24,000
Stock issuance at 6/30 5,000
What is the weighted - average number of shares Ceil should use to calculate its
basic earnings per share for the year ended December 31?
120,500
123,000
126,500
129,000

To calculate the basic earnings per share, the weighted average number of shares of
for the portion of the year they were outstanding. Stock dividends are treated as
if they had always been outstanding and included at full amount for current year.
Ceil Co. would use 126,500 weighted average number of common shares outstanding.

a Shares outstanding at 1/1 = (100,000 C/S ) x (12/12) 100,000
b Stock dividend at 3/31 24,000 C/S 24,000
c Stock issuance at 6/30 = (5,000 C/S ) x (6/12) 2,500
d Weighted average Number of shares o/s (a+b+c)
126,500
Option (a) is incorrect because it includes the prorated number of stock dividend.
Stock splits are retroactively adjusted.

a Shares outstanding at 1/1 = (100,000 C/S )
x (12/12) 100,000
b Stock dividend at 3/31 24,000 C/S x (9/12)
18,000
c Stock issuance at 6/30 = (5,000 C/S ) x (6/12) 2,500
d Weighted Average no. of shares o/s (a+b+c)
120,500
Option (b) is incorrect because it includes the prorated number of stock dividend.
Stock splits are retroactively adjusted. It fails to prorate the stock issued on
6/30.

b Stock dividend at 3/31 24,000 C/S x (9/12) 18,000
c Stock issuance at 6/30 5,000 C/S 5,000
123,000
Option (d) is incorrect because it does not prorate the stock issuance at 6/30.

b Stock dividend at 3/31 24,000 C/S 24,000
c Stock issuance at 6/30 5,000 C/S 5,000
129,000
34
FAR517456
The basic earnings per share is calculated. No dividends were declared during the
year. What would be the adjustment with respect to convertible non-cumulative
preferred stock on the numerator and denominator while calculating diluted earnings
per share?
Numerator Denominator
Cannot be determined No change
No change Increase
No change Decrease
Cannot be determined Increase

If the capital structure includes convertible non-cumulative preferred stock,
diluted earnings per share is calculated using the “if converted method”:
Numerator – Add back preferred dividends applicable to convertible preferred stock

(since these were deducted to compute income available to common stockholders).
Denominator – Increase as if convertible preferred stock had been converted at the

beginning of the period (or at the time of issuance, if later).
However, it is given in the question that no dividends were declared during the
year and the numerator would remain the same because the preference shares are non-
cumulative. There would be an increase in the denominator assuming the preferred
stock got converted at the beginning of the period (or at the time of issuance, if
later).
Options (a), (c) and (d) are incorrect based on the above explanation.
35
FAR511338
A company had the following outstanding shares as of January 1, year 2:
Preferred Stock ,$60 Par,4% Cumulative 10,000 shares

common stock,$ 3Par 50,000 shares
On April 1, year 2, the company sold 8,000 shares of previously unissued common
stock. No dividends were in arrears on January 1, year 2, and no dividends were
declared or paid during year 2. Net income for year 2 totaled $236,000. What amount
is basic earnings per share for the year ended December 31, year 2?
$3.66
$3.79
$4.07
$4.21

Income available to common shareholders = Net income - Preferred stock dividends.
Dividends on preference shares are deducted from the net income regardless of
whether it has been declared or not. The weighted average number of shares of
for the portion of the year they were outstanding.
Ref Summary Amount

a Net income for year 2 $236,000
b Dividends on preferred stock (10,000 shares x $60 Par) x 4%$24,000
c Net income available to common share holders (a-b) $212,000
d Common stock, $3 Par 50,000
e Unissued common stock sold on Apr 1,year 2 (8,000 shares x 9/12) 6,000
f Weighted average number of shares outstanding (d+e)
56,000
g Basic EPS (c/f) $3.79
Option (a) is incorrect because shares issued on April 1 are not prorated. {$3.66 =
[($236,000 - $24,000)/(50,000 shares + 8,000 shares sold)]}.
Option (c) is incorrect because it does not deduct the preferred dividends from net
income and fails to prorate the shares issued on April 1. {$4.07 =
[$236,000/(50,000 shares + 8,000 shares sold)]}.
Option (d) is incorrect because it does not deduct the preferred dividends from net
income. {$4.21 = [$236,000/(50,000 shares + (8,000 x 9/12) shares sold)]}.
36
FAR516995
Company Zee, since incorporation, had 500,000 ordinary shares outstanding as on

July 31, 20X2. On August 1, 20X2, company Zee made a bonus issue of 1 ordinary
share for every five shares held.
The income of company Zee net of tax was as follows:
20X1: $1,500,000
20X2: $3,750,000
Select what would be the EPS and adjusted EPS for years 20X2 and 20X1 respectively?
20X2 ($) 20X1 ($)
6.250 3.000
6.250 2.500
7.500 3.000
9.375 3.750
Stock dividends (or bonus issue), stock splits are treated as if they had always
been outstanding and included at full amount for current year. If prior periods are
presented, the effects of stock dividends and stock splits must be retroactively
adjusted for those periods.
In this case company Zee should treat the bonus issue as if it had occurred prior
to January 1, 20X1, the earliest period presented. The calculation is as follows:
Number of shares after bonus issue: 500,000 x 6 / 5 = 600,000.
Earnings per share 20X2: $3,750,000 / 600,000 = $6.25.
Adjusted earnings per share 20X1: $1,500,000 / 600,000 = $2.50.
Note: Earnings per share has been calculated with the help of below formula:
Income (or earnings) available to common shareholders

Weighted average number of common shares outstanding
Option (a) is incorrect because adjusted EPS for year 20X1 has not been calculated
assuming the bonus issue was incurred prior to January 1, 20X1. Bonus shares are
treated as if they had always been outstanding and included at full amount for
current year.
In a capitalization issue (or bonus issue or a share split), shares are issued to
existing shareholders, for no additional consideration. The number of shares
outstanding is increased without an increase in resources.
If prior periods are presented, the effects of stock dividends and stock splits
must be retroactively adjusted for those periods.
Option (c) is incorrect because it does consider the bonus shares for calculation
of EPS for both the years.
Earnings per share 20X2: $3,750,000 / 500,000 = $7.50.
Adjusted earnings per share 20X1: $1,500,000 / 500,000 = $3.00.
Option (d) is incorrect because for both years EPS calculation bonus shares have
been reduced from weighted average number of common shares outstanding calculation
(i.e. 500,000 -100,000 = 400,000).
37
FAR517232
WB co. reported net income of $80,000 for the year (and has an effective tax rate
of 20%). You are required to calculate the diluted earnings per share with the
following capital structure:
10% Preferred stock, $100 par value, 1,000 shares, cumulative
each convertible into 2 shares of common stock

$100,000
Common stock, $5 par value, 4,500 shares

$22,500
$17.78
$15.56
$12.31
$40

Basic earnings per share (EPS) = (Income available to common shareholders) /
(Weighted average number of commons shares outstanding).
Earnings = Net Income – Preference share dividends = $80,000 - $10,000.
Outstanding shares = 4,500.
Basic EPS = $70,000 / 4,500 = $15.56.
In order to calculate the diluted earnings per share, we need to adjust the
numerator and denominator for the complex capital structure with convertible stock
or securities using the “If converted method”.
Calculation of numerator:
Net income - preference dividend $70,000
Add: Preference dividend on convertible preference stock $10,000
Total
$80,000
Calculation of denominator:
Calculation of weighted average number of common shares outstanding for the year:
Weighted average number of common shares outstanding for the year

4,500
Preferred stock (if converted would result in additional 2,000 shares of common
stock) 2,000
Total
6,500
Thus, diluted EPS = $80,000 / 6,500 = $12.31.
Option (a) is incorrect because while calculating the diluted EPS using the if-
converted method, the denominator should also increase by the number of shares that
would increase if the convertible preference shares were converted (i.e. $17.78 =
$80,000 / 4,500).
Option (b) is incorrect because this represents the basic EPS.
Option (d) is incorrect because the diluted EPS has been calculated by dividing
only 2,000 (if-converted) shares instead of 6,500 (i.e. $40 = $80,000 / 2,000).
38
FAR511330
Wood Co.'s dividends on noncumulative preferred stock have been declared but not
paid. Wood has not declared or paid dividends on its cumulative preferred stock in
the current or the prior year and has reported a net loss in the current year. For
the purpose of computing basic earnings per share, how should the income available
to common stockholders be calculated?
The current-year dividends and the dividends in arrears on the cumulative preferred
stock should be added to the net loss, but the dividends on the noncumulative
preferred stock should not be included in the calculation.
The dividends on the noncumulative preferred stock should be added to the net loss,
but the current-year dividends and the dividends in arrears on the cumulative
preferred stock should not be included in the calculation.
The dividends on the noncumulative preferred stock and the current-year dividends
on the cumulative preferred stock should be added to the net loss.
Neither the dividends on the noncumulative preferred stock nor the current-year
dividends and the dividends in arrears on cumulative preferred stock should be
included in the calculation.

Preferred dividend on the cumulative preferred stock is deducted from the net
income or added to the net loss even if not declared. The dividends on the non-
cumulative preferred stock has been declared but not paid. So the dividends on the
non-cumulative preferred stock should also be added to the net loss. Therefore,
the current year dividends on the cumulative preferred stock (current year only)
and non-cumulative preferred stock should be added to the net loss.
Option (a) is incorrect because dividends in arrears for cumulative preferred

shares should not be added to the net loss when not declared. The dividends on non-
cumulative shares should be included when declared in net loss.
Option (b) is incorrect because the current year dividends for cumulative preferred
shares is added to net loss.
Option (d) is incorrect because the current year dividends should be included in
net loss for non-cumulative preference shares and for cumulative preference shares.
39
FAR517451
Under U.S GAAP, earnings per share should be reported for:
Other comprehensive income Cash flow
Yes Yes
Yes No
No No
No Yes
Earnings per share refer to the amount of earnings attributable to each share of
common stock. It also measures the performance of an entity over the reporting
period.
Publicly-held companies required to present basic and dilutive EPS on:

Face of the Statement of income for:
Income from continuing operations (ON-TID-N).
Net income (ON-TID-N).
Either face of the statement of income or in the notes to financial statements for:
Discontinued operations (ON-TID-N).
Thus, under US GAAP, earnings per share should neither be reported for other
comprehensive income nor it should be reported for cash flow.
40
FAR517233
Ronny corp. reported net income of $800,000 for the year ended December 31, 2XX2
(and has an effective tax of 30%).
7% Convertible bonds, $1,000 face value, 30 bonds,
each convertible into 50 shares of common stock

$30,000
Common stock, $10 par value, 100,000

$1,000,000
Preference stock dividends paid during current year (assuming
preferred stock is non-convertible)

$150,000
40,000 additional shares to be issued in Year 2XX3, as declared under contingently

issuable stock in Year 2XX1, due to an acquisition. Calculate the diluted earnings
per shares based on the given information for Ronny corp.
$6.42
$4.64
$4.60
$6.40

Basic earnings per share (EPS) = Earnings available to common shareholders /
Weighted average number of commons shares outstanding.
Any contingent shares issued are included for calculation of basic EPS if the
conditions for the same have been met. The contingent shares were issued in
relation to an acquisition in Year 2XX1. We assume all conditions for issuance have
been met in Year 2XX2 and the same are included to calculate the basic EPS.
Numerator: Earnings = Net Income – Preference share dividend = $800,000 - $150,000

= $650,000.
Denominator: Common shares outstanding + Contingent shares = 100,000 + 40,000 =

140,000.
Thus, basic EPS = $650,000 / 140,000 = $4.64.
Calculating diluted EPS:
Convertible bonds are included in calculation of diluted EPS using the “If
converted method”.
Numerator: Earnings – Preference dividend (non-convertible) + Interest paid on

convertible bonds (net of tax) = $800,000 - $150,000 + $2,100 x (100% - 30%) =
$650,000 + $1,470 = $651,470.
Denominator: Common shares outstanding + Contingent shares + Number of shares on

converting bonds = 100,000 + 40,000 + (50 x 30) = 141,500.
Diluted EPS = $651,470 / 141,500 = $4.60.
Option (a) is incorrect because it does not consider the contingent shares issued
in relation to an acquisition (i.e. $6.42 = $651,470 / 101,500).
Option (b) is incorrect because this represents the basic earnings per share.
Option (d) is incorrect because it doesn’t add back the interest on convertible
bonds and also does not consider the contingent shares (i.e. $6.40 = $650,000 /
101,500).
41
FAR516994
Earnings per share disclosure is required by:
Banking companies.
Public and private companies other than non-for-profit organizations.

Companies whose shares and potential shares are publicly traded.
All companies.

The guidance in the earnings per share requires presentation of earnings per share
(EPS) by all entities that have issued common stock or potential common stock (that
is, securities such as options, warrants, convertible securities, or contingent
stock agreements) if those securities trade in a public market either on a stock
exchange (domestic or foreign) or in the over-the-counter market, including
securities quoted only locally or regionally. This also requires presentation of
EPS by an entity that has made a filing or is in the process of filing with a
regulatory agency in preparation for the sale of those securities in a public
market.
It should be noted that the scope of ASC 260 excludes non-public entities and
entities whose publicly traded securities only include debt. However, an entity
that is not required to present EPS, but does so voluntarily, should present EPS in
accordance with the guidance in ASC 260.
42
FAR517693
British Airway’s net income is $470,000 and has 100,000 outstanding common stock
shares. It has 1,000 outstanding preferred shares of 10%, $100 par, 8% bond issued
at par last year for $200,000 with face value of $1,000 —each bond is convertible
to 50 shares of common stock. Calculate the basic EPS if the tax rate is 40%.
$4.60
$4.70
$4.18
$4.27

Basic EPS = (Net income – Preferred dividends) / Number of outstanding shares =
[$470,000 – (1,000 × $10)] / 100,000 = $4.60.
Option (b) is incorrect because this represents dividing the net income by the
number of outstanding shares without accounting for the preference dividend (i.e.
$4.7 = $470,000 / 100,000).
Option (c) is incorrect because this represents converting the convertible shares
(200 × 50 = 10,000) and adding them to the denominator in the basic EPS formula
(i.e. $4.18 = $460,000 / 110,000).
Option (d) is incorrect because this represents omitting the preferred dividends
from numerator and by converting the convertible shares (200 × 50 =10,000) and
adding them to the denominator in the basic EPS formula (i.e. $4.27 = $470,000 /
110,000).

EPS MCQS (42)

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EPS MCQS (42)

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1

Net income from january 1 to december 31 $125,000

The correct answer is (d).

Ref Common stock o/s Total number of

Basic/Diluted EPS = $7.94 ($125,000/15,750 shares).

Select which of the following statement is not true?

Options, warrants, unvested share-based payment awards and convertible securities

The correct answer is (a).

Option (c) is incorrect because basic EPS is calculated by dividing income

The correct answer is (b).

Particulars Amount (shares)

Option (a) is incorrect because instead of subtracting repurchased shares, these

The correct answer is (b).

Ref Summary Amount

200,000 shares of common stock issued and outstanding at 12/31/2XX1.

Issued additional 40,000 shares of common stock for cash on 7/1/2XX2.

Net income of $800,000 for the current year.

The correct answer is (b).

Calculation of weighted average number of common shares outstanding for 2XX2.

Particulars Number of shares

The correct answer is (a).

Numerator- Earnings are increased by the dividends or after-tax interest expense

3. Divide the revised profit by the revised number of shares = $828mn /

The correct answer is (a).

Effect on EPS due to conversion of securities is reported only when it has a

Option (b) is incorrect because $14.35 is calculated as Basic EPS – effect on

4/1 Issued 30,000 shares of common stock.

The correct answer is (b).

No. of months outstanding

Outstanding 100,000 shares

Issued 30,000 shares of common stock

Issued 36,000 shares of common stock

Declared a 5% stock dividend (retroactively adjusted from the time of issue)

5% (100,000 + 22,500 + 21,000)

Purchased as treasury stock 35,000 shares of its common stock

Weighted average common stock outstanding

The stock dividend is calculated as a percentage of the number of shares

Select which of the statement is false for disclosure by a publicly-held company?

U.S. GAAP prohibits reporting an amount of cash flow per share.

U.S. GAAP allows the presentation of other comprehensive income or total

The correct answer is (b).

Income from continuing operations {ON-TID-N}

Beginning of the earliest period reported (or at time of issuance, if later).

Beginning of the earliest period reported (regardless of time of issuance).

Middle of the earliest period reported (regardless of time of issuance).

Ending of the earliest period reported (regardless of time of issuance).

Option (b) is incorrect because under the “If-converted method” convertible

Option (c) is incorrect because under the “If-converted method” convertible

Option (d) is incorrect because under the “If-converted method” convertible

Common shares outstanding. 1/1 700,000

The correct answer is (c).

Ref Common Stock Outstanding Total Number Weighted Shares

Coffee Co. would use shares outstanding at 702,000.

Net Income from January 1 to December 31 $110,000

January 1 to April 30 12,000

The correct answer is (a).

Ref Common stock outstanding Total number of weighted shares O/S

Stock Dividend Stock split Cash dividends

Income available to the stockholders = Net income - (Cumulative preference

The correct answer is (b).

No. of months outstanding

Outstanding 400,000 shares

Issued 200,000 new shares for cash

12 months for 400,000 shares x 2 and 9 months for 200,000 shares x 2