IFA, IL 01, FR222

Intermediate Financial Accounting

Topic:
EPS: Earning Per Share

IAS - 33
(Theory + MCQ + Math & Previous Year Questions)

Mizanur Robel,

WhatsApp: +8801710500610

https://www.facebook.com/mizanur.robel.9

ICMAB Previous Year Questions Scenario 2021 Syllabus

January_2022 May_2022 September_2022 January_2023 May_2023 September_2023 January_2024
-- 6-b 5-a 5-b 5-b -- 5-b
EPS: Earning Per Share (IAS 33)
Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares
of its common stock. The resulting number serves as an indicator of a company's profitability.

The earnings per share figure is the amount attributable to every share of ordinary share
outstanding during the period.

The objective of the basic earning earnings per share information is to provide a measure of the
interest of each ordinary share of a parent entity in the performance of the entity over the
reporting period.

Two presentations of earnings per share:

1. Basic earnings per share

2. Diluted earnings per share

Uses of earning per share:

a. It is a determinant of the market price of ordinary share.

b. It is a “measure of performance”.
c. It is the basis of dividend policies of the company.

Basic EPS – Considers only ordinary shares issued and outstanding. The basic EPS or earnings per
share is an indicator of a company's ability to generate money on the basis of its share. Anyone
can evaluate a company’s profitability with the help of basic EPS and it also showcases the fair
price per share of the company.

The Basic Equation:

Net Income
Ordinary Shares Outstanding

Or,
Diluted EPS – Diluted earnings per share (EPS) is a measurement of a company's earnings per
share if all convertible securities were converted. Dilutive securities are securities that can be
converted to common stock. Dilution devalues a shareholder's existing equity stake and reduces
a firm's earnings per share.

Diluted earnings per share =

(Net Income – Preferred Dividends)

Weighted Average of Diluted Common Shares Outstanding

MCQ – Earning Per Share

01. Potential ordinary shares issued by a subsidiary should be included in the diluted EPS
calculation as they could potentially have an impact on the net profit for the period and the
number of shares to be included in the calculation. True

[CMA May Exam 2023]

02. An enterprise need disclose diluted EPS only if it differs from basic EPS by a material
amount. False.

[CMA May Exam 2023]

Correct Ans- For the purpose of calculating diluted earnings per share, an entity shall adjust profit
or loss attributable to ordinary equity holders of the parent entity, and the weighted average
number of shares outstanding, for the effects of all dilutive potential ordinary shares. [33.31]

03. Earnings per share disclosures are required only for

a. companies with complex capital structures.

b. companies that change their capital structures during the reporting period.

c. public companies.

d. private companies.

04. In computing the earnings per share of common stock, noncumulative preferred
dividends not declared should be

a. deducted from the net income for the year.

b. added to the net income for the year.

c. ignored.

d. deducted from the net income for the year, net of tax.

05. When computing earnings per share on common stock, dividends on cumulative,
nonconvertible preferred stock should be

a. deducted from net income only if the dividends were declared or paid in the
current period.

b. deducted from net income regardless of whether the dividends were not paid or
declared in the period.

c. deducted from net income only if net income is greater than the dividends.

d. ignored.
 06. In calculating diluted earnings per share, which of the following should not be
considered?

a. The weighted average number of common shares outstanding

b. The amount of dividends declared on cumulative preferred shares

c. The amount of cash dividends declared on common shares

d. The number of common shares resulting from the assumed conversion of

debentures outstanding

07. What is the correct treatment of a stock dividend issued in mid year when computing the
weighted-average number of common shares outstanding for earnings per share
purposes?

a. The stock dividend should be weighted by the length of time that the additional
number of shares are outstanding during the period.

b. The stock dividend should be included in the weighted-average number of

common shares outstanding only if the additional shares result in a decrease of 3
percent or more in earnings per share.

c. The stock dividend should be weighted as if the additional shares were issued at
the beginning of the year.

d. The stock dividend should be ignored since no additional capital was received.

08. The EPS computation that is forward-looking and based on assumptions about future
transactions is

a. diluted EPS. c. continuing operations EPS.

b. basic EPS. d. extraordinary EPS.

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

a. recognized only if they are dilutive.

b. recognized only if they are antidilutive.

c. recognized only if they were exercised.

d. ignored.
 10. Of the following, select the incorrect statement concerning earnings per share.

a. During periods when all income is paid out as dividends, earnings per share and
dividends per share under a simple capital structure would be identical.

b. Under a simple capital structure, no adjustment to shares outstanding is necessary

for a stock split on the last day of the fiscal period.

c. During a period, changes in stock issued or reacquired by a company may affect

earnings per share.

d. During a loss period, the amount of loss attributed to each share of common
stock should be computed.

11. In applying the treasury stock method of computing diluted earnings per share, when is
it appropriate to use the average market price of common stock during the year as the
assumed repurchase price?

a. Always

b. Never

c. When the average market price is higher than the exercise price

d. When the average market price is lower than the exercise price

12. Earnings per share information should be reported for all of the following except

a. continuing operations.

b. extraordinary gain.

c. net income.

d. cash flows from operating activities.

13. When using the if-converted method to compute diluted earnings per share, convertible
securities should be

a. included only if antidilutive.

b. included only if dilutive.

c. included whether dilutive or not.

d. not included.
 14. The if-converted method of computing EPS data assumes conversion of convertible
securities at the

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

b. beginning of the earliest period reported (regardless of time of issuance).

c. middle of the earliest period reported (regardless of time of issuance).

d. ending of the earliest period reported (regardless of time of issuance).

15. When computing dilutive EPS, the treasury stock method can be used for all of the
following except

a. convertible preferred stock. c. stock options.

b. stock warrants. d. stock rights.

16. For a company having several different issues of convertible securities and/or stock
options and warrants, the FASB requires selection of the combination of securities
producing

a. the lowest possible earnings per share.

b. the highest possible earnings per share.

c. the earnings per share figure midway between the lowest possible and the highest
possible earnings per share.

d. any earnings per share figure between the lowest possible and the highest
possible earnings per share.

17. For purposes of computing the weighted-average number of shares outstanding during
the year, a midyear event that must be treated as occurring at the beginning of the year
is the

a. declaration and issuance of a stock dividend.

b. purchase of treasury stock.

c. sale of additional common stock.

d. issuance of stock warrants.

 18. Where in the financial statements should basic and complex EPS figures for income from
continuing operations be reported?

a. In the accompanying notes

b. In management's discussion and analysis

c. On the income statement

d. On the statement of cash flows

19. The main purpose of reporting diluted earnings per share is to

a. provide a comparison figure for debt holders.

b. indicate earnings shareholders will receive in future periods.

c. distinguish between companies with a complex capital structure and companies

with a simple capital structure.

d. show the maximum possible dilution of earnings.

20. In determining earnings per share, interest expense, net of applicable income taxes, on
convertible debt which is dilutive should be

a. ignored for diluted earnings per share.

b. added back to net income for diluted earnings per share.

c. deducted from net income for diluted earnings per share.

d. none of the above.

21. When computing diluted EPS for a company with a complex capital structure, what is the
denominator in the computation?

a. Number of common shares outstanding at year-end

b. Weighted-average number of common shares outstanding

c. Weighted-average number of common shares outstanding plus all other

potentially antidilutive securities

d. Weighted-average number of common shares outstanding plus all other

potentially dilutive securities
 22. Under current GAAP, a company with a complex capital structure and potential earnings
per share dilution must present

a. primary and fully diluted earnings per share.

b. basic and diluted earnings per share.

c. basic and primary earnings per share.

d. basic earnings per share and cash flow per share.

23. Under current GAAP, common stock equivalents

a. are considered in calculating basic earnings per share.

b. are considered in calculating primary earnings per share.

c. are not considered in calculating basic earnings per share.

d. are not considered in calculating fully diluted earnings per share.

24. In calculating earning per share, stock options warrants, and rights are

a. always dilutive.

b. never dilutive.

c. dilutive if the exercise price is less than the average market price of the common
stock.

d. dilutive if the exercise price is more than the average market price of the common
stock.

25. For companies with a complex capital structure, a convertible security is potentially
dilutive if

a. its incremental EPS is greater than basic EPS after considering any stock options,
rights, and warrants.

b. its incremental EPS is less than basic EPS after considering any stock options,
rights, and warrants.

c. its incremental EPS is equal to basic EPS after considering any stock options,
rights, and warrants.
 26. An entity that reports a discontinued operation, an extraordinary item, or a cumulative
effect of an accounting change shall present basic and diluted earnings per share
amounts for those line items

a. only on the face of the income statement.

b. only in the notes to the financial statements.

c. either on the face of the income statement or in the notes to the financial
statements.

27. On December 31, 2005, Superior, Inc. had 600,000 shares of common stock issued and
outstanding. Superior issued a 10 percent stock dividend on July 1, 2006. On October 1,
2006, Superior reacquired 48,000 shares of its common stock and recorded the purchase
using the cost method of accounting for treasury stock. What number of shares should
be used in computing basic earnings per share for the year ended December 31, 2006?

a. 612,000 c. 648,000

b. 618,000 d. 660,000

28. At December 31, 2005, the Murdock Company had 150,000 shares of common stock
issued and outstanding. On April 1, 2006, an additional 30,000 shares of common stock
were issued. Murdock's net income for the year ended December 31, 2006, was
$517,500. During 2006, Murdock declared and paid $300,000 in cash dividends on its
nonconvertible preferred stock. The basic earnings per common share, rounded to the
nearest penny, for the year ended December 31, 2006, should be

a. $3.00. c. $1.45.

b. $2.00. d. $1.26.

29. At December 31, 2006 and 2005, Lapham Corp. had 200,000 shares of common stock
and 20,000 shares of 5 percent, $100 par value cumulative preferred stock outstanding.
No dividends were declared on either the preferred or common stock in 2006 or 2005.
Net income for 2006 was $1,000,000. For 2006, basic earnings per common share
amounted to

a. $5.00. c. $4.50.

b. $4.75. d. $4.00.
30. The Thomas Company's net income for the year ended December 31 was $30,000. During
the year, Thomas declared and paid $3,000 in cash dividends on preferred stock and
$5,250 in cash dividends on common stock. At December 31, 36,000 shares of common
stock were outstanding, 30,000 of which had been issued and outstanding throughout the
year and 6,000 of which were issued on July 1. There were no other common stock
transactions during the year, and there is no potential dilution of earnings per share. What
should be the year's basic earnings per common share of Thomas, rounded to the nearest
penny?

a. $0.66 c. $0.82

b. $0.75 d. $0.91

31. Bay Area Supplies had 60,000 shares of common stock outstanding at January 1. On May
1, Bay Areas Supplies issued 31,500 shares of common stock. Outstanding all year were
30,000 shares of nonconvertible preferred stock on which a dividend of $4 per share was
paid in December. Net income for the year was $290,100. Bay Area Supplies should report
basic earnings per share for the year of

a. $1.86. c. $2.84.

b. $2.10. d. $3.17.

32. Landrover, Inc. had 150,000 shares of common stock issued and outstanding at December
31, 2005. On July 1, 2006, an additional 25,000 shares of common stock were issued for
cash. Landrover also had unexercised stock options to purchase 20,000 shares of common
stock at $15 per share outstanding at the beginning and end of 2006. The market price of
Landrover's common stock was $20 throughout 2006. What number of shares should be
used in computing diluted earnings per share for the year ended December 31, 2006?

a. 182,500 c. 177,500

b. 180,000 d. 167,500

33. Glendale Enterprises had 200,000 shares of common stock issued and outstanding at
December 31, 2005. On July 1, 2006, Glendale issued a 10 percent stock dividend.
Unexercised stock options to purchase 40,000 shares of common stock (adjusted for the
2006 stock dividend) at $20 per share were outstanding at the beginning and end of 2006.
The market price of Glendale's common stock (which was not affected by the stock
dividend) was $25 per share during 2006. Net income for the year ended December 31,
2006, was $1,100,000. What should be Glendale's 2006 diluted earnings per common
share, rounded to the nearest penny?
 a. $4.23 c. $5.00

b. $4.82 d. $5.05

34. On January 2, 2005, Worley Co. issued at par $50,000 of 4 percent bonds convertible, in
total, into 5,000 shares of Worley's common stock. No bonds were converted during 2005.
Throughout 2005 Worley had 5,000 shares of common stock outstanding. Worley's 2005
net income was $5,000. Worley's income tax rate is 40 percent. No potentially dilutive
securities other than the convertible bonds were outstanding during 2005. Worley's
diluted earnings per share for 2005 would be

a. $0.58. c. $0.70.

b. $0.62. d. $1.16.

35. At December 31, 2005, Dayplanner Inc. had 250,000 shares of common stock outstanding.
On October 1, 2006, an additional 60,000 shares of common stock were issued for cash.
Dayplanner also had 2,000,000 of 8 percent convertible bonds outstanding at December
31, 2006, which are convertible into 50,000 shares of common stock. The bonds are dilutive
in the 2006 earnings per share computation. No bonds were issued or converted into
common stock during 2006. What is the number of shares that should be used in
computing diluted earnings per share for the year ended December 31, 2006?

a. 265,000 c. 310,000

b. 300,000 d. 315,000

36. During its fiscal year, Richards' Distributing had net income of $100,000 (no extraordinary
items) and 50,000 shares of common stock and 10,000 shares of preferred stock
outstanding. Richards declared and paid dividends of $.50 per share to common and $6.00
per share to preferred. The preferred stock is convertible into common stock on a share-
for-share basis. For the year, Richards Distributing should report diluted earnings (loss) per
share of

a. $(0.80). c. $1.67.

b. $1.00. d. $2.67.
37. Datatec, Inc., had 400,000 shares of $20 par common stock and 40,000 shares of $100 par,
6% cumulative, convertible preferred stock outstanding for the entire year ended
December 31, 2006. Each share of the preferred stock is convertible into 5 shares of
common stock. Datatec's net income for 2006 was $1,680,000. For the year ended
December 31, 2006, the diluted earnings per share is

a. $2.40. c. $3.60.

b. $2.80. d. $4.20.
 Math - EPS

1) Mufti Ltd. Is producing its draft financial statements for 2018. The draft statement of profit or
loss is as follows:
2018 (Tk. ‘000)
Revenue 33,600
Cost of sales (27,900)
Gross Profit 5,700
Expenses (1,617)
Profit before tax 4083
Income Tax Expense (1,225)
Profit for the year 2,858

It has been discovered that items valued at Tk. 2.1m which were included in inventory at at 31
December 2017 had in fact been sold before that year end. Retained Earnings at 31 December
2017 were reported as Tk. 9,638,000. Cost of sales for 2018 includes the Tk. 2.1m error in
opening inventory. No dividends have been declared or paid.

Show the corrected statement of profit or loss for 2028 and the corrected Retained earnings
extract from the statement of changes in equity. Ignore any effect on Taxation.

[CA Manual P-133, CMA January Exam 2024]

2) On 1 January 2018 and 1 January 2019 Box plc had in issue 10 million ordinary shares. On 30
June 2019 Box plc made a 1 for 4 rights issues at Tk. 2.40 per share. At that date the market
price before the issue was announced was Tk. 3.20 per share. The earnings of the company
were Tk. 4 million for 2018 and Tk. 4.8 million for 2019.
Required:
Calculate the reported basic EPS for 2019 (including the comparative).
[CA Manual P-155, CMA May Exam 2023]

3) BAQ is a listed entity with a financial year end of 31 March. At 31 March 20X7, it had 8,000,000
ordinary shares in issue.
The directors of BAQ wish to expand the business’s operations by acquiring competitor entities.
They intend to make no more than one acquisition in any financial year. The directors are about
to meet to discuss two possible acquisitions. Their principal cri- terion for the decision is the
likely effect of the acquisition on group earnings per share. Details of the possible acquisitions
are as follows:

Acquisition of CBR
100% of the share capital of CBR could be acquired on 1 October 20X7 for a new issue of shares
in BAQ;
 CBR has 400,000 ordinary shares in issue;
Four CBR shares would be exchanged for three new shares in BAQ;
CBR’s profit after tax for the year ended 31 March 20X7 was Tk.625,000 and the entity’s directors
are projecting a 10% increase in this figure for the year ending 31 March 20X8.

Acquisition of DCS
80% of the share capital of DCS could be acquired on 1 October 20X7 for a cash payment of
Tk.10.00 per share;
DCS has 1,00,000 ordinary shares in issue;
The cash would be raised by a rights issue to BAQ’s existing shareholders. For the purposes of
evaluation, it can be assumed that the rights issue would take place on 1 October 20X7, that it
would be fully taken up, that the market value of one share in BAQ on that date would be Tk.5.36,
and that the terms of the rights issue would be one new share for every five BAQ shares held at a
rights price of Tk.5.00;
DCS’s projected profit after tax for the year ending 31 March 20X8 is Tk.860,000.
BAQ’s profit after tax for the year ended 31 March 20X8 is projected to be Tk.4.2 million. No
changes in BAQ’s share capital are likely to take place, except in respect of the possible
acquisitions described above.

Required:
Calculate the group earnings per share that could be expected for the year ending 31 March 20X8
in respect of each of the acquisition scenarios outlined above.
[Fina. Acc.- Mitchell Franklin, Patty, CMA January Exam 2023]

4) In 2020, Buraka Enterprises issued, at par, 75 Tk. 1,000, 8% bonds, each convertible into 100
ordinary shares. The liability component of convertible bonds was Tk. 950 per bond, based on
a market rate of interest of 10%. Buraka had revenues of Tk. 17,500 and expenses other than
interest and taxes of Tk. 8,400 for 2021. (Assume that the tax rate is 40%.) Throughout 2020,
2,000 ordinary shares were outstanding; none of the bonds was converted or redeemed.

Required:
(i) Compute diluted earnings per share for 2021.
(ii) Assume the same facts as those assumed for part (i), except that the 75 bonds were issued on
September 1, 2021 (rather than in 2020), and none have been converted or redeemed.
(iii) Assume the same facts as assumed for part (i), except that 25 of the 75 bonds were actually
converted on July 1, 2021.
[Kieso E16-22, CMA Sept. Exam 2022]
5) Amy Dyken, controller at Fitzgerald Pharmaceutical Industries, a public company, is currently
preparing the calculation for basic and diluted earnings per share and the related disclosure
for Fitzgerald’s financial statements. Below is selected financial information for the fiscal year
ended June 30, 2017.

The following transactions have also occurred at Fitzgerald.

1. Options were granted on July 1, 2016, to purchase 200,000 shares at $15 per share. Although
no options were exercised during fiscal year 2017, the average price per common share during
fiscal year 2017 was $20 per share.
2. Each bond was issued at face value. The 8% convertible bonds will convert into common stock
at 50 shares per $1,000 bond. The bonds are exercisable after 5 years and were issued in fiscal
year 2016.
3. The preferred stock was issued in 2016.
4. There are no preferred dividends in arrears; however, preferred dividends were not declared in
fiscal year 2017.
5. The 1,000,000 shares of common stock were outstanding for the entire 2017 fiscal year.
6. Net income for fiscal year 2017 was $1,500,000, and the average income tax rate is 40%.
Instructions
For the fiscal year ended June 30, 2017, calculate the following for Fitzgerald Pharmaceutical
Industries.
(a) Basic earnings per share.
(b) Diluted earnings per share.

[Kieso P16-5, CMA May Exam 2022]

6) On December 31, 2004, Jamfest Travel Inc. had 450,000 shares of no-par common stock issued
and outstanding. All shares were sold for $7.50. On June 30, 2005, the firm issued an additional
135,000 shares for $7 per share. The 2005 income was $319,200. On September 1, 2006, a 15
percent stock dividend was issued to all common shareholders. On October 1, 2006, 60,000
shares were reacquired as treasury shares. Net income in 2006 was $278,063.

(1) Compute the weighted-average number of common shares outstanding for 2005
and 2006 that should be shown on comparative statements at the end of 2006.

(2) Compute the basic earnings per share in 2005 and 2006 to be reported on
comparative statements at the end of 2006.

7) The income statement of Micro Computers, Inc. showed the following information on
December 31, 2006.

Income before income tax ............................. $1,472,000

Income tax expense ................................... 441,600

Income from continuing operations .................... $1,030,400

Extraordinary loss (net of tax savings) .............. (100,000)

Net income ........................................... $ 930,400

Compute earnings per share figures for common stock under the assumption that Micro
Computer Inc. has

(1) 320,000 shares of $24 par value common stock outstanding.

(2) 9,600 shares of $100, par 8% cumulative preferred stock, and 240,000 shares
of no-par common stock. Dividends are not in arrears.

Note: Assumption (1) is independent of (2).

8) During 2006, the Ellis Corporation had 370,000 shares of $20 par common stock outstanding.
On January 1, 2006, 2,000, 8 percent bonds were issued with a maturity value of $1,000 each.
To enhance the bond sale, the company offered a conversion of 50 shares of common stock
for each bond at the option of the purchaser. Net income for 2006 was $464,000. The income
tax rate was 30 percent.
Compute the diluted earnings per share of common stock.
9) During 2006, Wright Corp. had outstanding 125,000 shares of common stock and 7,500 shares
of noncumulative, 8 percent, $50 par preferred stock. Each preferred share is convertible into 8
shares of common stock. In 2006, net income was $231,500.

(1) Compute basic and diluted earnings per share for 2006 assuming no
dividends were declared or paid.

(2) Compute basic and diluted earnings per share for 2006 assuming dividends
were declared and paid on the preferred stock.

10) On December 31, 2006, Masters Inc. had outstanding 180,000 shares of common stock. Net
income for 2006 was $285,000. Outstanding options (granted July 1, 2006) to purchase 15,000
shares of common stock at $20 per share had not been exercised by December 31, 2006. During
2006, market prices for the common stock were:

July 1, 2006 .................................... $18 per share

December 31, 2006 ............................... $32 per share

Average market .................................. $25 per share

(1) Compute the basic earnings per common share in 2006.

(2) Compute the diluted earnings per common share in 2006.

11) During all of 2005, Dawson Manufacturing Company had 950,000 shares of common stock
outstanding. On June 30, 2005, the company issued 10,000 7 percent convertible bonds at par.
The maturity value of each bond is $1,000. Each bond is convertible into 20 shares of common
stock. None were converted during 2005. Dawson also had 60,000 stock warrants outstanding
for all of 2005. The option price is $10 per share. The market price of the common stock was
$40 on December 31, 2005, and the average market price for 2005 was $30.

Dawson reported a net income of $3,650,000 for 2005. Assume the company had a 40 percent
income tax rate.

(1) Compute the basic earnings per share.

(2) Compute diluted earnings per share.

12) Flagstad Inc. presented the following data.
Net income $2,500,000
Preferred stock: 50,000 shares outstanding,
$100 par, 8% cumulative, not convertible 5,000,000
Common stock: Shares outstanding 1/1 750,000
Issued for cash, 5/1 300,000
Acquired treasury stock for cash, 8/1 150,000
2-for-1 stock split, 10/1
Instructions
Compute earnings per share. [Kieso, E16-18]

13) A portion of the combined statement of income and retained earnings of Seminole Inc. for the
current year follows.

Note: During the year, Seminole Inc. suffered a major loss from discontinued operations of $1,340,000
after applicable income tax reduction of $1,200,000.

At the end of the current year, Seminole Inc. has outstanding 8,500,000 shares of $10 par common
stock and 50,000 shares of 6% preferred. On April 1 of the current year, Seminole Inc. issued
1,000,000 shares of common stock for $32 per share to help finance the loss from discontinued
operations.

Instructions
Compute the earnings per share on common stock for the current year as it should be reported
to stockholders. [Kieso, E16-19]
14) On January 1, 2017, Lennon Industries had stock outstanding as follows.
6% Cumulative preferred stock, $100 par value,
issued and outstanding 10,000 shares $1,000,000
Common stock, $10 par value, issued and
outstanding 200,000 shares 2,000,000
To acquire the net assets of three smaller companies, Lennon authorized the issuance of an
additional 160,000 common shares. The acquisitions took place as shown below.
Date of Acquisition Shares Issued
Company A April 1, 2017 50,000
Company B July 1, 2017 80,000
Company C October 1, 2017 30,000
On May 14, 2017, Lennon realized a $90,000 (before taxes) gain on discontinued operations.
On December 31, 2017, Lennon recorded income of $300,000 from continuing operations.

Instructions
Assuming a 50% tax rate, compute the earnings per share data that should appear on the financial
statements of Lennon Industries as of December 31, 2017. [Kieso, E16-20]

15) At January 1, 2017, Langley Company’s outstanding shares included the following.
280,000 shares of $50 par value, 7% cumulative preferred stock
900,000 shares of $1 par value common stock
Net income for 2017 was $2,530,000. No cash dividends were declared or paid during 2017. On
February 15, 2018, however, all preferred dividends in arrears were paid, together with a 5% stock
dividend on common shares. There were no dividends in arrears prior to 2017.
On April 1, 2017, 450,000 shares of common stock were sold for $10 per share, and on
October 1, 2017, 110,000 shares of common stock were purchased for $20 per share and held as
treasury stock.

Instructions
Compute earnings per share for 2017. Assume that financial statements for 2017 were issued in
March 2018. [Kieso, E16-21]
16) On June 1, 2015, Andre Company and Agassi Company merged to form Lancaster Inc. A total
of 800,000 shares were issued to complete the merger. The new corporation reports on a
calendar-year basis.
On April 1, 2017, the company issued an additional 400,000 shares of stock for cash. All
1,200,000 shares were outstanding on December 31, 2017.
Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2017.
Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds
have been converted to date.
Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2017. The
annual report will show earnings per share figures based upon a reported after-tax net income
of $1,540,000. (The tax rate is 40%.)
Instructions
Determine the following for 2017.
(a) The number of shares to be used for calculating:
(1) Basic earnings per share.
(2) Diluted earnings per share.
(b) The earnings figures to be used for calculating:
(1) Basic earnings per share.
(2) Diluted earnings per share. [Kieso, E16-23]

17) The Simon Corporation issued 10-year, $5,000,000 par, 7% callable convertible subordinated
debentures on January 2, 2017. The bonds have a par value of $1,000, with interest payable
annually. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date
of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Simon’s
effective tax was 35%. Net income in 2017 was $9,500,000, and the company had 2,000,000
shares outstanding during the entire year.
Instructions
(a) Prepare a schedule to compute both basic and diluted earnings per share.
(b) Discuss how the schedule would differ if the security was convertible preferred stock.
[Kieso, E16-24]

18) On January 1, 2017, Crocker Company issued 10-year, $2,000,000 face value, 6% bonds, at par.
Each $1,000 bond is convertible into 15 shares of Crocker common stock. Crocker’s net income
in 2017 was $300,000, and its tax rate was 40%. The company had 100,000 shares of common
stock outstanding throughout 2017. None of the bonds were converted in 2017.
Instructions
(a) Compute diluted earnings per share for 2017.
(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that
$1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred
share is convertible into 5 shares of Crocker common stock. [Kieso, E16-25]
19) Venzuela Company’s net income for 2017 is $50,000. The only potentially dilutive securities
outstanding were 1,000 options issued during 2016, each exercisable for one share at $6. None
has been exercised, and 10,000 shares of common were outstanding during 2017. The average
market price of Venzuela’s stock during 2017 was $20.
Instructions
(a) Compute diluted earnings per share. (Round to nearest cent.)
(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued
on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of
2017 was $20. [Kieso, E16-26]

20) Howat Corporation earned $360,000 during a period when it had an average of 100,000
shares of common stock outstanding. The common stock sold at an average market price of $15
per share during the period. Also outstanding were 15,000 warrants that could be exercised to
purchase one share of common stock for $10 for each warrant exercised.
Instructions
(a) Compute basic earnings per share.
(b) Compute diluted earnings per share. [Kieso, E16-28]

21) The information below pertains to Barkley Company for 2018.

There were no changes during 2018 in the number of common shares, preferred shares, or
convertible bonds outstanding. There is no treasury stock. The company also has common stock
options (granted in a prior year) to purchase 75,000 shares of common stock at $20 per share.

Instructions
(a) Compute basic earnings per share for 2018.
(b) Compute diluted earnings per share for 2018. [Kieso, P16-8]
22) The following information is available for an entity.
Earnings CU’000
20X2 1,000
20X3 1,300
20X4 1,500
Number of shares in issue at 1 January 20X2: 800,000
Rights issue: 1 for 4 at CU5 each on 1 April 20X3 when the market value was CU7

What are the basic EPS amounts for each of the three years after adjustment for the rights issue?
[CA Manual P 154]

23) At 1 January 20X4 and 1 January 20X5 X Ltd had in issue 20 million ordinary shares. During
20X5 the following events took place.
31 May 20X5 Issue of 6 million shares for cash at full market price
30 September 20X5 Bonus issue of 1 for 2
Earnings for the year ended 31 December 20X4 were CU 6m and for the year ended 31 December
20X5 were CU 8m.
Requirements
(a) Calculate the basic EPS originally reported in 20X4.
(b) Calculate the basic EPS reported in 20X5 including comparative.
[CA Manual P 153]

24) Mitchell Bros Ltd had 14 million ordinary shares in issue on 1 January 20X4 and 20X5. In its
financial year ended 31 December 20X5 it issued further shares as follows:
• On 1 April, four million shares in consideration for the majority holding in another entity; and
• On 1 July a rights issue of 1 for 6 at a price of CU15 per share. The market price of Mitchell
Bros shares immediately prior to the rights issue had been CU20 per share. A profit of CU17 million
attributable to the ordinary equity holders was reported for 20X5 and CU14 million for 20X4.
The shares issued on the acquisition were issued at their full fair value.
Requirement
Calculate basic EPS for the year ended 31 December 20X5 and the basic EPS for the year ended
31 December 20X4, as restated in the 31 December 20X5 financial statements.
[CA Manual P 161]
 For more knowledge

25) Assume that Amazon.com has a stock-option plan for top management. Each stock option
represents the right to purchase a share of Amazon $1 par value common stock in the future
at a price equal to the fair value of the stock at the date of the grant. Amazon has 5,000 stock
options outstanding, which were granted at the beginning of 2017. The following data relate
to the option grant.
Exercise price for options $40
Market price at grant date (January 1, 2017) $40
Fair value of options at grant date (January 1, 2017) $6
Service period 5 years
Instructions
(a) Prepare the journal entry(ies) for the first year of the stock-option plan.
(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options,
700 shares of restricted stock were granted at the beginning of 2017.
(c) Now assume that the market price of Amazon stock on the grant date was $45 per share.
Repeat the requirements for (a) and (b).
(d) Amazon would like to implement an employee stock-purchase plan for rank-and-file
employees, but it would like to avoid recording expense related to this plan. Which of the
following provisions must be in place for the plan to avoid recording compensation expense?
(1) Substantially all employees may participate.
(2) The discount from market is small (less than 5%).
(3) The plan offers no substantive option feature.
(4) There is no preferred stock outstanding. [Kieso, P16-4]

26) Melton Corporation is preparing the comparative financial statements for the annual report to
its shareholders for fiscal years ended May 31, 2017, and May 31, 2018. The income from
operations for the fiscal year ended May 31, 2017, was $1,800,000 and income from continuing
operations for the fiscal year ended May 31, 2018, was $2,500,000. In both years, the company
incurred a 10% interest expense on $2,400,000 of debt, an obligation that requires interest only
payments for 5 years. The company experienced a loss from discontinued operations of
$600,000 on February 2018. The company uses a 40% effective tax rate for income taxes.

The capital structure of Melton Corporation on June 1, 2016, consisted of 1 million shares of
common stock outstanding and 20,000 shares of $50 par value, 6%, cumulative preferred stock.
There were no preferred dividends in arrears, and the company had not issued any convertible
securities, options, or warrants.

On October 1, 2016, Melton sold an additional 500,000 shares of the common stock at $20 per
share. Melton distributed a 20% stock dividend on the common shares outstanding on January
1, 2017. On December 1, 2017, Melton was able to sell an additional 800,000 shares of the
common stock at $22 per share. These were the only common stock transactions that occurred
during the two fiscal years.
 Instructions
(a) Identify whether the capital structure at Melton Corporation is a simple or complex capital
structure, and explain why.

(b) Determine the weighted-average number of shares that Melton Corporation would use in
calculating earnings per share for the fiscal year ended:
(1) May 31, 2017.
(2) May 31, 2018. [Kieso, P16-6]

27) On May 1, 2017, Friendly Company issued 2,000 $1,000 bonds at 102. Each bond was issued
with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the
fair value of the warrants cannot be determined.

Instructions
(a) Prepare the entry to record the issuance of the bonds and warrants.
(b) Assume the same facts as part (a), except that the warrants had a fair value of $30. Prepare
the entry to record the issuance of the bonds and warrants. [Kieso, E16-9]

28) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the
purchase of 20,000 shares of the company’s $10 par common stock at $25 per share. The
options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in
the employ of the company, and expiring December 31, 2024. The service period for this award
is 2 years. Assume that the fair value option-pricing model determines total compensation
expense to be $350,000.
On April 1, 2019, 2,000 options were terminated when the employees resigned from the
company. The market price of the common stock was $35 per share on this date.
On March 31, 2020, 12,000 options were exercised when the market price of the common stock
was $40 per share.

Instructions
Prepare journal entries to record issuance of the stock options, termination of the stock options,
exercise of the stock options, and charges to compensation expense, for the years ended
December 31, 2018, 2019, and 2020. [Kieso, E16-11]
29) On January 1, 2016, Nichols Corporation granted 10,000 options to key executives. Each option
allows the executive to purchase one share of Nichols’ $5 par value common stock at a price of
$20 per share. The options were exercisable within a 2-year period beginning January 1, 2018,
if the grantee is still employed by the company at the time of the exercise. On the grant date,
Nichols’ stock was trading at $25 per share, and a fair value option-pricing model determines
total compensation to be $400,000.
On May 1, 2018, 8,000 options were exercised when the market price of Nichols’ stock was $30
per share. The remaining options lapsed in 2020 because executives decided not to exercise
their options.
Instructions
Prepare the necessary journal entries related to the stock option plan for the years 2016 through
2020. [Kieso, E16-12]

30) Derrick Company issues 4,000 shares of restricted stock to its CFO, Dane Yaping, on January 1,
2017. The stock has a fair value of $120,000 on this date. The service period related to this
restricted stock is 4 years. Vesting occurs if Yaping stays with the company for 4 years. The par
value of the stock is $5. At December 31, 2018, the fair value of the stock is $145,000.
Instructions
(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date
of grant), and December 31, 2018.
(b) On March 4, 2019, Yaping leaves the company. Prepare the journal entry (if any) to
account for this forfeiture. [Kieso, E16-13]

31) Tweedie Company issues 10,000 shares of restricted stock to its CFO, Mary Tokar, on January
1, 2017. The stock has a fair value of $500,000 on this date. The service period related to this
restricted stock is 5 years. Vesting occurs if Tokar stays with the company until December 31,
2021. The par value of the stock is $10. At December 31, 2017, the fair value of the stock is
$450,000.
Instructions
(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant),
and December 31, 2018.
(b) On July 25, 2021, Tokar leaves the company. Prepare the journal entry (if any) to account for
this forfeiture. [Kieso, E16-14]

32) Ace Company had 200,000 shares of common stock outstanding on December 31, 2018. During
the year 2019, the company issued 8,000 shares on May 1 and retired 14,000 shares on October
31. For the year 2019, Ace Company reported net income of $249,690 after a loss from
discontinued operations of $40,600 (net of tax).
Instructions
What earnings per share data should be reported at the bottom of its income statement?
[Kieso, E16-17]