Problems with solutions
5 - Share based compensation (equity and cash settled)
5 - earnings per share
5 - diluted earnings
Basic Earnings per Share
1. During 2019, Dreams Company declared P2,400,000 cash dividends from earnings for the calendar
year ended 2018 to 8% cumulative preference shares. In addition, there is a declaration of worth P
900,000 cash dividends for 10% noncumulative preference shares. The company reported P9,000,000
profit exclusive of 30% income tax rate. Details of acquisition and disposition of shares for the year
2018 are as follows:
1/1/2018 Issued 100,000, P200 par 8% cumulative preference shares
1/1/2018 Issuance of 80,000, P120 par 10% noncumulative preference shares
1/1/2018 P32,400,000 ordinary shares outstanding, P90 par value
3/31/2018 Issued 40,000 ordinary shares at P90 par value
6/30/2018 Reissued 5,000 treasury shares at P90 par value
10/31/2018 Acquired 90,000 treasury shares at P60 cost per share
Requirement: Compute for the basic earnings per share.
Solution:
6300,000* – 1,600,000* – 900,000 / 377,500* = 10.07
9,000,000 – 30% income tax rate = 6,300,000
For cumulative, only one year dividend is deducted – 100,000 * 200 * 8% = 1,600,000
For noncumulative, only declared dividend is deducted
For the weighted average number of ordinary shares:
1/1/2018 – 32,400,000/90 = 360,000
3/31/2018 – 40,000 * 9/12 = 30,000
6/30/2018 – 5,000 * 6/12 = 2,500
10/31/2018 – (90,000) * 2/12 = (15,000)
Total 377,500
2. In 2018, Given the 30% income tax rate, MAE Co. reports in its Statement of Comprehensive
Income profit amounting to P12,000,000. This does not include P3,500,000 loss after tax due to fire
accident at year-end. The company’s shareholders’ equity had shares with its breakdown for the
calendar year:
P20,000,000, P200 par 8% cumulative preference shares
P10,000,000, P80 par 12% noncumulative preference shares
P30,000,000, P60 par ordinary shares
Requirement: Compute for the basic earnings per share.
Solution:
8,500,000* -1,600,000 preferred dividends / 500,000* = 13.80
12,000,000 profit is presumed to be profit after tax.
3,500,000 should be deducted because earnings includes infrequent items.
30,000,000/60 = 500,000
3. In 2019, the KISH Company reported P6,000,000 profit in its income statement. Also, the KISH
Company declared property dividends worth P3,500,000 to ordinary shareholders. Its earnings included
P4,000,000 gain on sale of equipment. The company’s shareholders’ equity had shares in its notes for
the year ended December 31, 2019 below:
January 1 Ordinary shares outstanding
March 31 Issued shares previously reacquired in 2018
May 31 Issued a 15% share dividends
July 1 Issued shares for property consideration
August 31 Acquired treasury shares
November 1 Issued shares for inventory
December 1 Issued a 1-for-4 share split
Requirement: Compute for basic earnings per share.
6,000,000/ 306,500 = 19.58
*Preferred dividends are to be deducted not ordinary dividends.
*Share dividends and share splits are as of original issuance.
For the weighted average number of ordinary shares:
1/1/2019 – 800,000 *115% / 4 = 230,000
3/31/2019 – 240,000 * 115% / 4 multiply by 9/12 = 51,750
7/1/2019 – 250,000 * 6/12 divided by 4 = 31,250
08/31/2019 – (150,000) * 4/12 divided by 4 = (12,500)
11/1/2019 – 144,000 * 2/12 divided by 4 = 6,000
Total 306,500
800,000
240,000
250,000
150,000
144,000