CHAPTER 12
PROFIT AND CHANGES
IN RETAINED EARNINGS
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Brief
Exercises
B. Ex. 12.1
B. Ex. 12.2
B. Ex. 12.3
B. Ex. 12.4
B. Ex. 12.5
B. Ex. 12.6
B. Ex. 12.7
B. Ex. 12.8
B. Ex. 12.9
B. Ex. 12.10
Exercises
12.1
12.2
12.3
12.4
12.5
Topic
Extraordinary loss
Extraordinary gain
Discontinued operations
Cash and stock dividends
Statement of changes in equity
Statement of changes in equity
Cash dividend journal entries
stock dividend journal entries
Shareholders' equity section of
balance sheet
Comprehensive income
Topic
12.12
12.13
Stock dividends and share splits
Terminology
Discontinued operations
Extraordinary items
Earnings per share: effect of
preference share
Restating earnings per share for
stock dividends
Stock dividends and splits
Effect of stock dividends on share
price
Effects of transactions upon
financial measurements
Effects of transactions upon
earnings per share
Identifying source of desired
financial information
Comprehensive income
Cash and stock dividends
12.14
Real World: adidas AG
12.6
12.7
12.8
12.9
12.10
12.11
Learning
Objectives
Skills
1
1
1
6
5
7,8
6
6
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
Analysis
6,8
4
Analysis
Analysis
Learning
Objectives
6
1 –4, 6-8
1, 2
1, 2
2
2, 6
Skills
Analysis, communication
Analysis
Analysis
Analysis
Analysis
Analysis
6
6
Analysis
Communication
8
Analysis
2, 6
1, 5, 8
4
6
3, 4
EPS and dividends
© The McGraw-Hill Companies, Inc., 2010
Overview
Communication
Analysis
Analysis
Analysis, communication,
judgment
Analysis, communication
12.15
Real World: adidas AG
1, 8
Analysis of share information
© The McGraw-Hill Companies, Inc., 2010
Overview
Analysis, communication
Sets A, B
12.1 A,B
12.2 A, B
12.3 A, B
12.4 A, B
12.5 A, B
12.6 A, B
12.7 A, B
12.8 A, B
12.9 A, B
Topic
Objectives
Reporting unusual events
Format of statements of income
and retained earnings
Reporting unusual events: a
comprehensive problem
Share splits, stock dividends,
treasury share, and book value
Statement of shareholders’ equity
Dividends and treasury share
transactions
Effects of transactions upon
financial measurements
Shareholders’ equity:
comprehensive
Format of an income statement
Skills
1, 2
1, 2, 5, 7
Analysis
Analysis, communication
1, 2, 4, 7
Analysis, communication
6
Analysis, communication
6, 8
Analysis, communication
6
Analysis
8
Analysis, communication
6
Analysis
1, 2
Analysis
Critical Thinking Cases
12.1
12.2
12.3
12.4
12.5
12.6
Real World: Hutchison
Telecommunications International
Limited, Vodafone plc, Cathay
Pacific, Shiseido Company, limited
Reporting special events
Forecasting continuing
operations
Interpreting earnings per share
Analyzing statement of shareholders’
equity
Classifying unusual items
Real World: Vodafone plc
Analyzing shareholders' equity and EPS
1
Analysis, communication
1
Analysis, communication
1 –3
8
Analysis, communication
Analysis, communication
1, 2, 8
Analysis, communication
8
Communication, research,
Technology
© The McGraw-Hill Companies, Inc., 2010
Overview (p.2)
DESCRIPTIONS OF PROBLEMS AND
CRITICAL THINKING CASES
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume
use of the partially filled-in working papers.
Problems (Sets A and B)
12.1 A,B
Greater Asian Airlines/Pacific Airlines
Preparation of a condensed income statement and earnings per
share figures for a company with a discontinued segment and an
extraordinary loss. Emphasizes format of the income statement
rather than computation of amounts. Students also are asked to
forecast future operating results.
30 Easy
12.2 A,B
Slick Software Limited/Beach Limited
A comprehensive problem on reporting the results of operations.
Stresses the format of an income statement and statement of
changes in equity, with disclosure of “unusual items.” EPS
computation involves ordinary and preference shares outstanding.
30 Medium
12.3 A,B
Phoenix Limited/Dexter Limited
Given an incorrectly prepared income statement, student is asked
to draft a revised income statement and a statement of changes in
equity. Includes discontinued operations, an extraordinary item, an
accounting change, and a prior period adjustment.
35 Strong
12.4 A,B
Albers Limited/Jessel Limited
Demonstrates the effect of various transactions upon total
shareholders’ equity, number of shares outstanding, and book
value per share. Includes share splits, stock dividends, and treasury
share transactions.
20 Easy
12.5 A,B
Strait Corporation/ Dry Wall Limited
Preparation of a statement of shareholders’ equity. Stresses an
understanding of the effects of various transactions upon the
elements of shareholders’ equity.
20 Medium
12.6 A,B
Thompson Service/Greene Limited
A comprehensive problem on cash dividends, stock dividends, and
treasury share transactions. Requires journal entries and
preparation of shareholders’ equity section of the balance sheet.
Student is asked to compute maximum amount available for
dividends.
40 Strong
12.7 A,B
Tech Process Limited/Hot Water Limited
Explanation of the effects of equity transactions on various
financial measures.
30 Strong
© The McGraw-Hill Companies, Inc., 2010
Description Problems
Problems (cont'd)
12.8 A,B
Mandella Corporation/Adams Corporation
Preparation of the shareholders’ equity section of a balance sheet in two
successive years. Transactions affecting shareholders’ equity include
issuance of ordinary share, a stock dividend, purchase and sale of
treasury share, cash dividends, and a share split.
50 Strong
12.9 A,B
Esper Corporation/Blue Jay Manufacturing Corp.
Preparation of a partial income statement for Esper Corp., including
discontinued operations, an extraordinary loss, and an accounting
change. Emphasizes format of the income statement rather than
computation of amounts. Students also are asked to compute earnings
per share.
25 Strong
Critical Thinking Cases
12.1
What's This?
20 Easy
Four “unusual events” taken from the published financial statements of
well-known corporations. Students are asked to indicate whether each
event qualifies as an extraordinary item, a discontinued operation, or an
accounting change.
12.2
Is There Life Without Baseball?
Student is presented with an income statement containing discontinued
operations and an extraordinary item and is asked to forecast future
earnings. Requires an understanding of recurring versus nonrecurring
events. Good practice for interpreting annual reports.
20 Medium
12.3
Using Earnings Per Share Statistics
Student is given six earnings per share figures, including earnings from
continuing operations, earnings before extraordinary items, and net
earnings, computed on both a basic and diluted basis. From this
information, student is asked to determine the amount of the
extraordinary loss, to use a p/e ratio to estimate share price, and to
forecast future performance.
30 Strong
12.4
Interpreting a Statement of Shareholders' Equity
Student is asked to answer specific questions requiring analysis and
understanding of items reported in the statement of shareholders' equity.
35 Strong
12.5
Classification of Unusual Items - and the Potential Financial
Impact
Students discuss the classification of unusual items from several
perspectives—accounting principles, pressures on management, cash
flows, and probable effects on share price. Adapted from an actual case;
illustrates the “real world” aspects of financial reporting. Good group
assignment.
60 Strong
© The McGraw-Hill Companies, Inc., 2010
Desc. of Cases
Critical Thinking Cases (cont'd).
12.6
Comparing Price-Earnings Ratios
Internet
Students are to obtain information on the Internet about a Fortune 500
company and an emerging company. They are to compare p/e ratios and
speculate on the reasons for the differences.
© The McGraw-Hill Companies, Inc., 2010
Desc. of Cases (p.2)
30 Easy
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1. The purpose of presenting subtotals such as Profit from Continuing Operations and Profit from
Discontinued Operations is to assist users of the income statement in making forecasts of future
earnings. By excluding the operating results of discontinued operations and the effects of unusual
and nonrecurring transactions, these subtotals indicate the amount of income derived from the
company’s ongoing, normal operations.
2. The discontinued operations classification is used in the income statement only when a business
discontinues an entire segment of its activities. Frank’s has two business segments—pizza parlors
and the baseball team. Only if one of these segments is discontinued in its entirety will the
company report discontinued operations. The sale or closure of a few parlors does not represent
the disposal of the pizza parlor segment of the company’s business activities.
3. Extraordinary items are defined as 'income or expenses that arise from events or transactions that
are clearly distinct from the ordinary activities of the enterprise and therefore are not expected to
recur frequently or regularly'.
According IAS 1 paragraph 85, "An entity shall not present any items of income and expense as
extraordinary items, either on the face of the income statement or in the notes." It is because items
treated as extraordinary result from the normal business risks faced by an entity and do not warrant
presentation in a separate component of the income statement. The nature or function of a
transaction rather than frequency, should determine its presentation within the income statement.
Items currently classified as 'extraordinary' are only a subset of the items of income and expense
that may warrant disclosure to assist users in predicting an entity's future performance.
4. The restructuring charges should be combined and presented as a line item in the company’s
income statement in determining operating income.
In predicting future earnings for the company, the charges generally should not be considered to be
costs that will be incurred in the future. In fact, if the program of downsizing is successful,
operating results in the future could be expected to improve as a result of having incurred the
restructuring charges.
5. A material error represents a correction of an error in the amount of income reported in a prior
period. A material error are shown in the statement of changes in equity (or statement of
shareholders’ equity) as an adjustment to the balance of retained earnings at the beginning of the
period in which the error is identified.
6. Irregular income items, such as discontinued operations, and material error, are legitimate parts of
the earnings history of a company. On the other hand, they are non-recurring and should not carry
the same weight in evaluating future profitability as normal, recurring operating revenues and
expenses.
7. a.
The current-year preference share dividend is deducted from profit to determine the earnings
allocable to the ordinary shareholders. (the preference share dividend is deducted only if
declared.)
© The McGraw-Hill Companies, Inc., 2010
Q1-7
b.
The par value of all preference share outstanding and the amount of all dividends in arrears
on preference share are deducted from total shareholders’ equity to determine the aggregate
book value allocable to the ordinary shareholders.
8.
No, the number of ordinary shares used in computing earnings per share may be different from
that used to determine book value per share. In computing earnings per share, earnings
allocable to the ordinary shareholders is divided by the weighted-average number of ordinary
shares outstanding throughout the period. In computing book value per share at a specified date,
shareholders' equity allocable to the ordinary shareholders is divided by the number of ordinary
shares actually outstanding on that date. If the number of ordinary shares outstanding has not
changed during the period, the weighted-average number of ordinary shares outstanding during
the period will be equal to the number of ordinary shares outstanding on a particular date.
9.
a.
The price-earnings ratio is computed by dividing the market price of a share of ordinary
share by the annual earnings per share.
b.
The amount of basic earnings per share is computed by dividing the profit available for
ordinary share by the weighted-average number of ordinary shares outstanding during the
year.
c.
The amount of diluted earnings per share is computed by dividing profit by the maximum
potential number of shares outstanding after convertible securities are assumed to have been
converted.
a.
Shares used in computing basic earnings per share:
Ordinary shares outstanding throughout the year ……………………………….
10.
b.
3,000,000
Shares used in computing diluted earnings per share:
Ordinary shares outstanding throughout the year ………………………………… 3,000,000
Additional ordinary shares that would exist if preference share had
been converted at the beginning of the year (150,000 x 2) ………………………
300,000
Total shares used in diluted earnings computation ……………………………… 3,300,000
11.
The analyst should recognize the risk that the outstanding convertible securities may be
converted into additional ordinary share, thereby diluting (reducing) basic earnings per share in
future years. If any of the convertible securities are converted, basic earnings per share probably
will increase at a slower rate than profit. In fact, if enough dilution occurs, basic earnings per
share could actually decline while profit continues to increase.
12.
Date of declaration is the day the obligation to pay a dividend comes into existence by action
of the board of directors. Date of record is the day on which the particular shareholders who
are entitled to receive a dividend is determined. Persons listed in the corporate records as
owning share on this day will receive the dividend. Date of payment is the day the dividend is
distributed by the corporation. Ex-dividend date (usually three business days prior to the date
of record) is the day on which the right to receive a recently declared dividend no longer
attaches to share. As a result, the market price of the shares usually falls by the
amount of the dividend.
13.
The purpose of a stock dividend is to make a distribution of perceived value to shareholders as a
representation of the profitability of the company while, at the same time, conserving cash.
© The McGraw-Hill Companies, Inc., 2010
Q8-13
14.
A share split occurs when there is a relatively large increase in the number of shares issued without
any change in the total amount of stated capital (because the par value per share is reduced
proportionately to the increase in the number of shares).
A stock dividend occurs when there is a relatively small increase in the number of shares issued, with
no change in the net assets of the company but a transfer from retained earnings to the issued and paid
capital section of the balance sheet. The par value of share remains the same.
The distinction in the accounting treatment of a stock dividend and a share split stems directly from
the difference in the effect on stated (legal) capital and retained earnings. There is no difference in the
probable effect on per-share market price of a stock dividend and a share split of equal size, although
share splits are usually much larger than stock dividends.
15.
Restructuring charges result when the company incurs costs in the process of reorganization, often
downsizing. The purpose of reorganization is to benefit future operations in terms of more efficient
operations, but the cost is ordinarily charged to current operations. Restructuring charges are not
extraordinary items, and unless they directly related to a discontinued part of the business, are not
presented as discontinued operations. They are often presented as a single line item in the income
statement, before income taxes.
16.
Three items that may be shown in a statement of comprehensive income as causing changes in the
balance of retained earnings are:
(1) Profit or loss for the period
(2) Dividends declared (both cash dividends and stock dividends)
(3) Gains or losses arising from the fair value changes of Available For Sale investments
17.
If the price of the share declines in proportion to the distribution of shares in a stock dividend, at the
time of that distribution the shareholder does not benefit. He/she holds exactly the same percentage of
the outstanding shares, and the value per share has declined in proportion to the increased number of
shares. Often, however, the value does not drop in proportion to the increased number of shares,
meaning that the recipient of the shares has an immediate benefit. For example, if an investor who
held 2,000 share that had a market value of $10 each received a 10% stock dividend, and the market
price only declined 5%, the following would result:
Market value before stock dividend:
2,000 shares @ $10 …………………………………………………………….
Market value after stock dividend:
(2,000 shares x 110%) x ($10 x 95%) ……………………………………….
$20,000
$20,900
The investor has benefited by $900. He/she could sell about 95 shares [$900/($10 x 95%)] at $9.50
and still have a share investment equal to the value before the stock dividend, although the investor
would own a smaller percentage of the company after the sale.
18.
A liquidating dividend is a return of the investment made in the company to the investor, in contrast
to a non-liquidating dividend which is a return on the investment in the company. A liquidating
dividend occurs when dividends are distributed in excess of a company’s retained earnings.
© The McGraw-Hill Companies, Inc., 2010
Q14-18
19.
The student is right in one sense—both share splits and stock dividends are distributions of a company’s
shares to existing shareholders with the company receiving no payment in return. The student is incorrect,
however, in stating that the two are exactly the same. The primary difference is one of magnitude and,
thus, the impact on market value. A stock dividend is usually relatively small—5% to 20% of the
outstanding shares. A share split, on the other hand, is usually some multiple of the number of outstanding
shares, like a 2:1 split (100% increase) or a 3:1 split (200% increase). The market price reacts strongly to a
distribution as large as a share split while stock dividends are often unnoticed in the share price.
© The McGraw-Hill Companies, Inc., 2010
Q19-20
SOLUTIONS TO BRIEF EXERCISES
FELLUPS LIMITED
Partial Income Statement
For year ended _______________
B.Ex. 12.1
Profit from continuing operations
$75,000
Loss from discontinued operations, net of $40,000 income taxes
Profit …………………………………………………………….
(60,000)
$15,000
WALKER COMPANY
Income Statement
For year ended _______________
B.Ex. 12.2
Revenues
Expenses
Operating Profit
$1,500,000
1,200,000
$300,000
149,500
$449,500
Other non-operating profit
Profit
IFRS does not allow the presentation of extraordinary item in the financial statements
B.Ex. 12.3
WABASH LIMITED
Income Statement
For year ended _______________
Revenues
Expenses
Income from continuing operations
Discontinued operations:
Operating income from discontinued operations, net of
$10,000 income taxes
Loss on the sale of discontinued operations, net of
$22,000 income tax benefit
Profit
B.Ex. 12.4
$480,000
430,000
$50,000
$15,000
Number of ordinary shares outstanding after stock dividend:
© The McGraw-Hill Companies, Inc., 2010
BE12.1,2,3,4
33,000
($18,000)
$32,000
100,000 shares x 110% = 110,000
Cash required to pay $.50 per stock dividend:
110,000 shares x $.50 = $55,000
© The McGraw-Hill Companies, Inc., 2010
BE12.1,2,3,4
B.Ex. 12.5
MESSER COMPANY
Statement of Comprehensive Income
For year ended _______________
Profit for the year
Other comprehensive income:
Gain on fair value changes of available for sale
investments
Total comprehensive income
B.Ex. 12.6
SALT & PEPPER LIMITED
Statement of Changes in Equity
For year ended _______________
Share capital, beginning of the year
Retained earnings, beginning of year
Corrections of error in prior year's financial statements
Shareholders' Equity, beginning of year, as restated
Add: Profit
Deduct: Preference share dividends
Ordinary dividends
Shareholders' Equity, end of year
$20,000*
100,000**
*10,000 shares $1 x 2 years = $20,000
**200,000 shares x $.50 = $100,000
B.Ex. 12.7
Cash dividend on preference share:
100,000 shares x $100 par x 6%
Cash dividend on ordinary share:
750,000 shares x $.75
Total dividends
Journal entries to record declaration and payment of cash dividends:
Retained earnings…………………………………
Dividends payable……………………………..
To record dividends declared on preference and
ordinary shares.
1,162,500
Dividends payable……………………………….
1,162,500
© The McGraw-Hill Companies, Inc., 2010
BE12.5,6,7
Cash…………………………………………….
To record payment of dividends.
© The McGraw-Hill Companies, Inc., 2010
BE12.5,6,7
88,000
25,000
$113,000
$100,000
$460,000
(65,000)
$495,000
250,000
$745,000
120,000
$625,000
$600,000
562,500
$1,162,500
1,162,500
© The McGraw-Hill Companies, Inc., 2010
BE12.5,6,7
1,162,500
© The McGraw-Hill Companies, Inc., 2010
BE12.5,6,7
B.Ex. 12.8
Retained earnings…………………………………
Stock dividend to be distributed….…………
Share premium……………………
To record declaration of stock dividend.
375,000*
250,000 **
125,000 ***
*500,000 shares x 5% x $15 = $375,000
**500,000 shares x 5% x $10 = $250,000
***500,000 shares x 5% x ($15 - $10) = $125,000
Stock dividend to be distributed…………………
Ordinary shares…………………………………
To record distribution of stock dividend.
B.Ex. 12.9
250,000
250,000
ALEXANDER LIMITED
Shareholders' Equity Section of Balance Sheet
(Date)
Ordinary share, 770,000 shares, $5 par value
Share premium on ordinary shares
Retained earnings
Total shareholders' equity
$3,850,000 *
2,590,000 **
$6,440,000
155,000 ***
$6,595,000
*700,000 shares x 1.10 x $5 = $3,850,000
**700,000 shares x ($8 - $5) + 70,000 shares x ($12 - 5) =
$2,100,000 + $490,000 = $2,590,000
***$995,000 - (70,000 shares x $12) = $155,000
B.Ex. 12.10
CRASHER COMPANY
Statement of Comprehensive Income
For year ended _______________
Profit for the year
Other comprehensive income:
Gain on the fair value changes of available for sale
investments
Total comprehensive income
© The McGraw-Hill Companies, Inc., 2010
BE12.8,9,10
$500,000
20,000
$520,000
SOLUTIONS TO EXERCISES
Ex. 12.1
a. 1,440 shares = [(200 x 2) x 120%] x 3
$17,280 = 1,440 x $12.
b. Since Smiley is a small and growing corporation, the board of directors probably
decided that cash from operations was needed to finance the company’s expanding
operations.
c. You are probably better off because of the board’s decision not to declare cash
dividends. Smiley was obviously able to invest the funds to earn a high rate of
return, as evidenced by the value of your investment, which has grown from
$1,000 to $17,280.
Ex. 12.2
a. None (Treasury share is not an asset; it represents shares that have been
reacquired by the company, not shares that have not yet been issued.)
b. Stock dividend
c. Share premium
d. Retrospective restatement
e. P/e ratio (Market price divided by earnings per ordinary share.)
f. Discontinued operations (Showing the discontinued operations in a separate
section of the income statement permits presentation of the subtotal, Income from
Continuing Operations.)
g. Diluted earnings per share
h. Total comprehensive income
Ex. 12.3
a.
SPORTS LIMITED
Income Statement
For the Year Ended December 31, 20__
Sales ………………………………………………………………..
Costs and expenses (including applicable income tax)
Profit from continuing operations
Discontinued operations:
Operating loss from tennis shops (net of income
tax benefit) …………………………………………… $192,000
Loss on sale of tennis shops (net of income tax benefit)
348,000
Profit …………………………………………………………….
Earnings per share:
Earnings from continuing operations ($3,900,000

182,000 shares)
Loss from discontinued operations ($540,000  182,000) ….
Net earnings ($3,360,000  182,000 shares) ………………..
© The McGraw-Hill Companies, Inc., 2010
E12.1,2,3
$12,500,000
8,600,000
$3,900,000
(540,000)
$3,360,000
$21.43
(2.97)
$18.46
b.
Ex. 12.4
The $21
predicti
results
operati
a.
Net sale
Less: C
Profit f
Gain on
Profit
Earnin
Ex. 12.5
b.
The $1.
Global
comput
a.
1.
2.
b.
The ear
ordinar
diluted
necessit
comput
© The McGraw-Hill Companies, Inc., 2010
E12.4,5
.43 earnings per share figure from continuing operations (part a) is probably the most useful one f
ng future operating results for Sports Limited Earnings per share from continuing operations repr
f continuing and ordinary business activity, which is expected to continue in the future. Discontinu
ns and extraordinary items are not likely to recur in the future.
GLOBAL EXPORTS
Income Statement
For the Year Ended December 31, 20__
s …………………………………………………………………………………………….
sts and expenses (including income tax) ……………………………….
om continuing operations …………………………………………………….
disposal of discontinued operations, net of income tax ………………………………………………
……………………………………………………………………………..
s per share of ordinary share:
Earnings from continuing operations ($1,550,000

910,000 shares) …………………..
Earnings arising from the disposal of discontinued operations ($420,000  910,000 shares) ………
Net earnings ($1,970,000  910,000 shares) ………………………………
0 earnings per share before continuing operations is the figure used to compute the price-earnings
xports. If a company reports a gain or loss resulting from discontinued operations, the price-earni
d using the per-share earnings befor e discountin ued item.
Profit (all applicable to ordinary shares) ………………
Ordinary shares outstanding throughout the year ..
Earnings per share ($1,920,000  400,000 shares) ………..
Profit ……………………………………………………………………..
Less: Preference share dividend (100,000 x 8% x $100) ………………….
Earnings available for ordinary share ……………………………………….
Ordinary shares outstanding throughout the year ………………..
Earnings per share ($1,120,000

300,000 shares) ……………………
ings per share figure computed in part a (2) is a basic EPS figure. Although the company has outs
and preference share, the preference share must be convertible into ordinary share in order to re
computation of earnings per share. The potential conversion of preference share into ordinary shar
ates disclosure of diluted EPS. Because the preference share in this exercise is not convertible, the E
tion is basic.
© The McGraw-Hill Companies, Inc., 2010
E12.4,5
r
sents the
d
$7,750,000
6,200,000
1,550,000
420,000
$1,970,000
$1.70
0.46
$2.16
ratio for
gs ratio is
$1,920,000
400,000
$4.80
$1,920,000
800,000
$1,120,000
300,000
$3.73
anding both
ult in a
e is what
PS
© The McGraw-Hill Companies, Inc., 2010
E12.4,5
Ex. 12.6
2009
a.
2008
Earnings per share ……………………………
$1.88
$1.575 (1)
(1) $3.15 originally reported, divided by 2 (twice as many shares)
(2) $2.40 originally reported, divided by 2
Ex. 12.7
2007
$1.20 (2)
b.
Following the stock dividend, the earnings per share of earlier periods should be
retroactively restated to reflect the increased number of shares. In this situation, each
"new” share (after the 100% stock dividend) is equal to only one-half of a 2008 or 2007
share. If the earnings of each 2008 or 2007 share are allocated between the two “new”
shares, each new share is viewed as having earned one-half of the original amount ($3.15
¸ 2 = $1.575; $2.40 ¸ 2 = $1.20).
a.
Apr.
June
30 Memorandum: Issued an additional 1,000,000 shares in a 2-for-1 share split.
Par value reduced from $1 per share to $0.50 per share.
1 Dividends ……………………………………………
Dividends Payable ………………………
To record the declaration of a dividend of 60
cents per share on 2 million share outstanding.
1,200,000
1 Dividends Payable …………………………………
Cash ………………………………………
To record payment of the dividend declared on
June 1.
1,200,000
1 Retained Earnings …………………………………
Stock Dividend to Be Distributed …….
Share Premium: Stock Dividends
To record declaration of a 5% stock dividend
consisting of 100,000 shares (2,000,000 shares x
5%) of $0.50 par value ordinary share. Amount
of retained earnings transferred to equity is based
on market price of $19 a share.
1,900,000
Sept. 10 Stock Dividend to Be Distributed …………………
Ordinary Shares …………………………
To record distribution of a stock dividend of
100,000 shares.
50,000
July
Aug.
1,200,000
1,200,000
50,000
1,850,000
50,000
b.
2,100,000 shares
1,000,000 + 1,000,000 + 100,000
c.
$0.50 par val ue per shar e ($1 par r educed to $0.50 par du e to 2-f or- 1 shar e spli t on Apr il
30.)
d.
Share split—No effect
Declaration/payment of cash dividend—Decrease retained earnings
Declaration/distribution of stock dividend—No effect
© The McGraw-Hill Companies, Inc., 2010
E12.6,7
Ex. 12.8
The market value of the total Express Limited’s shares outstanding is $5,280,000
(80,000 ´ $66) before the stock dividend. Because the issuance of new shares has no
effect on the net assets of the company, there is no basis of predicting any change in
total market value of the company’s share as a result of the stock dividend. The
logical conclusion is, therefore, that the market price per share should fall to $60
($5,280,000 ¸ 88,000 shares). The fact that this exact result does not always follow in
practice must be attributed to a lack of understanding on the part of the investing
public and to other factors affecting per-share market price at the time of a stock
dividend.
Shareholders’
Event
Current
Assets
Equity
Profit
Net Cash
(from Any
Source)
a
b
c
d
e
D
NE
NE
D
I
D
NE
NE
D
I
NE
NE
NE
NE
NE
D
NE
NE
D
I
Ex. 12.9
Ex. 12.10 a.
After a share split, earnings per share are expressed in terms of the new shares.
Therefore, a 3-for-1 share split will cause earnings per share figures to be
restated at one-third of their former amounts.
b.
Realization of a gain from most sources, including discontinued operations,
increases net earnings per share. (As this gain relates to discontinued operations,
however, it would not increase the per-share earnings from continuing
operations. )
c.
Dividends declared or paid do not enter into the determination of profit.
Therefore, the declaration and/or payment of a cash dividend on ordinary share
has no effect upon earnings per share.
d.
Earnings per share are restated to reflect the increased number of shares
resulting from a stock dividend. Therefore, a stock dividend causes a
proportionate reduction in the earnings per share reported in past periods, as
well as in the current period. (This effect parallels that of a share split, only
smaller.)
e.
Acquisition of treasury shares reduces the weighted average number of shares
currently outstanding and, therefore, increases earnings per share.
© The McGraw-Hill Companies, Inc., 2010
E12.8,9,10
Ex. 12.11
Ex. 12.12
a.
Balance sheet.
b.
Statement of Chang
c.
This information is
publications such as
d.
Statement of Chang
e.
Statement of Chang
f.
Income statement.
g.
This information ma
formal financial stat
h.
This information ma
financial statements.
newspapers.
i.
Statement of Chang
a.
Revenues …………
Expenses …………
Profit before income
Income tax* ………
Profit ………………
*$290,000 x 35%
b.
Profit for the year…
Other comprehensiv
Gains arising
Total comprehensiv
* $19,200 $17,500
$1,700 ($1,700 x 3
© The McGraw-Hill Companies, Inc., 2010
E12.11,12
s in Equity
ot included in any formal financial statement—it is quoted daily in
The Fi nancial T imes.
s in Equity
s in Equity and/or notes to financial statements.
y be reported in the annual report, but it is not a required disclosure in any
ement. It is also reported by investors’ services.
y be included in the annual report, but it is not a required disclosure in
It is reported by investors’ services and in the financial pages of most
s in Equity, and statement of cash flows.
………………………………………………….
………………………………………………….
tax …………………………………………….
………………………………………………….
……………………………………………..
$572,000
282,000
$290,000
101,500
$188,500
……………………………………………………………
e income:
from the fair value changes of available-for-sale investments* …
income ……………………………………………….
$188,500
1,105
$189,605
$1,700 gain
% income tax) = $1,105 gains.
© The McGraw-Hill Companies, Inc., 2010
E12.11,12
c.
Profit is unchanged.
Profit for the year
Other comprehensi
Loss arising
Comprehensive inc
* $17,500 $14,200
$3,300 ($3,300 x
Ex. 12.13
a.
10% stock dividend
2:1 share split: 550,
Note: The cash divi
b.
$1 cash dividend: 5
$.60 cash dividend:
Total cash paid: $5
Note: No cash is pai
c.
220 shares [(100 sh
Market value of por
Market value of por
220 shares x $40
Your portfolio after
addition, you would
(100 shares x 1.1
Ex. 12.14
a.
adidas AG seems to
and products and m
company retains th
its growth opportun
business.
b.
Based on informati
you should probabl
the form of higher
you could do as an i
paid higher dividen
© The McGraw-Hill Companies, Inc., 2010
E12.13,14
.
$ 188,500
………………………………………………………………………….
e income:
from the Fair Value Changes of available-for-sale investments* ………
(2,145)
$186,355
me …………………………………………………………
= $3,300 loss
5% income tax benefit) = $2,145 loss
: 500,000 shares x 1.10 = 550,000 shares
00 x 2 = 1,100,000 shares
ends do not affect the number of outstanding shares.
0,000 shares x $1 = $550,000
1,100,000 shares x $.60 = $660,000
0,000 + $660,000 = $1,210,000
d out with a stock dividend or a share split.
res x 1.10) x 2]
tfolio before the four transactions: 100 shares x $65 = $6,500
tfolio after the four transactions:
= $8,800
the four transactions is $8,800 compared to $6,500 before the four transactions. In
have received cash dividends, as follows:
x $1) + (110 shares x 2 x $.60) = $110 + $132 = $242
be an aggressive company. It is constantly acquiring or introducing new brands
aking extensive promotion plan, that requires large amounts of capital. The
majority of its earnings in order to have the capital available to take advantage of
ities and to constantly introducing new brands and products for its growing
n in the Case-in-Point in this chapter, unless you have an extreme need for cash,
be pleased that adidas AG retains its earnings rather than paying them to you in
ividends. The company is doing well investing its earnings, probably better than
ndividual investor with the additional dividends you would receive if the company
ds.
© The McGraw-Hill Companies, Inc., 2010
E12.13,14
Ex. 12.15
a.
adidas AG did not report any irregular items for the year 2008 and 2009.
b.
adidas AG seems to have one kind of share in its capital structure. 209 million
share capital had been issued. No information is available for its par value and
authorized capital. Indeed, note 26 of adidas AG (not enclosed) shows adidas'
share having no par value.
c.
During the two years presented, adidas AG repurchased shares in 2007 (with a
decrease in share capital of €10 million and capital reserves of €399 million) and
issued share for the conversion of convertiable bond (with an increase in share
capital of €16 million and in capital reserves of €384 million).
© The McGraw-Hill Companies, Inc., 2010
E12.15
30 Minutes, Easy
SOLUTIONS TO PROBL
PROB
GREATER ASIAN
a.
GREATER ASIAN AIRLINES
Income Statement
For the Year Ended December 31, 20__
Sales
Costs and expenses (including income taxes on continuing
operations)
Profit from continuing operations
Discontinued operations:
Operating profit from motels (net of income tax)
Gain on sale of motels (net of inco me tax)
Profit
Earnings per share of ordinary share:
Earnin s from continuin o erations $11,800,000
1,000,000 shares)
Profit from discontinued operations ($5,820,000 ¸
1,000,000 shares)
Profit ($17,620,000 
1,000,000 shares)
b.

Estimated net earnings per share next year:
Earnings per share from continuing operations
Estimated decrease ($11.80 x 5%)
Estimated net earnings per share next year
The profitability of the motels is not relevant, as these
motels are no longer owned by Greater Asian Airlines.
© The McGraw-Hill Companies, Inc., 2010
P12.1A
$
864,000
,
,
MS SET A
EM 12.1A
AIRLINES
$
55,120,000
$
,
,
11,800,000
,
,
,
,
11.80
5.82
17.62
$
11.80
(0.59)
11.21
© The McGraw-Hill Companies, Inc., 2010
P12.1A
PROBLEM 12.2A
SLICK SOFTWARE LIMITED
30 Minutes, Medium
a.
SLICK SOFTWARE LIMITED
Condensed Income Statement
For the Year Ended December 31, 2009
Sales
Costs and expenses (including applicable income taxes)
Profit from continuing operations
Discontinued operations:
Operating profit (net of income tax)
Loss on disposal (net of inco me tax benefit)
Profit
$
$
Earnings per share:
Earnings from continuing operations
[($2,950,000 - $500,000*)  200,000 shares]
Loss from discontinued operations ($410,000  200,000 shares)
Net earnings
[($2,540,000 - $500,000 preference share dividends) ÷ 200,000 shares
Net earnings
[($1,640,000 - $500,000 preference share dividends) ¸
200,000 shares]
*Preference share dividends: 80,000 shares x $6.25 = $500,000
© The McGraw-Hill Companies, Inc., 2010
P12.2A
$
19,850,000
16,900,000
2,950,000
$
(410,000)
2,540,000
140,000
(550,000)
$
12.25
(2.05)
$
10.20
$
5.70
PROBLEM 12.2A
SLICK SOFTWARE LIMITED (concluded)
b.
Total cash dividends declared during 2009 (data given)
Less: Preference share dividend (80,000 shares x $6.25 per share)
Cash dividends to ordinary shareholders
Number of ordinary shares outstanding through 2009
Cash dividend per ordinary share ($450,000 ÷ 200,000 shares)
c.
$
950,000
500,000
450,000
200,000
2.25
The single 2010 $8.00 figure for EPS is unfavorable in comparison with 2009 performance.
Since 2010 has only one EPS figure, it should be compared to the earnings per share from
continuing operations in 2009, which amounted to $12.25 per share. Slick Software Limited’s
earnings per share from continuing operations fell $4.25 per share (approximately 35%)
from 2009 to 2010.
© The McGraw-Hill Companies, Inc., 2010
P12.2A (p.2)
PROBLEM 12.3A
PHOENIX LIMITED
35 Minutes, Strong
a.
PHOENIX LIMITED
Income Statement
For the Year Ended December 31, 2009
Sales
Costs and expenses:
Cost of goods sold
Selling expenses
General and administrative expenses
Loss from settlement of litigation
Income tax on continuing operations
Profit from continuing operations
Discontinued operations:
Operating loss on discontinued operations (net of
income tax benefit)
Loss on disposal of discontinued operations (net of
income tax benefit)
Profit
$
$
$
10,836,000
$
9,744,000
1,092,000
6,000,000
1,104,000
1,896,000
24,000
720,000
(252,000)
(420,000)
(672,000)
420,000
Earnings per share on ordinary share:
Earnings from continuing operations ($1,092,000
180,000 shares)
Loss from discontinued o erations $672,000
180,000 shares)
Net earnin s $420,000 180,000 shares

$
6.07
$
.
2.34

Note: Selected EPS numbers have been rounded $.01 in order
for EPS schedule to foot.
© The McGraw-Hill Companies, Inc., 2010
P12.3A
PROBLEM 12.3A
PHOENIX LIMITED (concluded)
b.
The “gain on sale of treasury share” represents the excess of reissue price received over the
cost Phoenix paid to acquire some of its own share. Although a corporation may reissue
treasury share at prices above or below its cost of acquiring its own share, the difference
between amounts received and the cost of treasury shares does not result in gains or losses
recognized in the income statement. Rather, the amount described as “gain on sale of
treasury share” is included as part of share premium in the shareholders’ equity section of
the balance sheet.
© The McGraw-Hill Companies, Inc., 2010
P12.3A (p.2)
PROBLEM 12.4A
ALBERS LIMITED
20 Minutes, Easy
Beginning balance
Jan. 10 Declared and distributed 5% share div.
Balance
Mar. 15 Acquired 2,000 treasury share
at cost of $21.00 per share
Balance
May 30 Reissued 2,000 treasury share
at price of $31.50 per share
Balance
July 31 Share capital split 2-for-1
Balance
Dec. 15 Declared $1.10 per share cash dividend
Balance
Dec. 31 Profit
Balance
Total
Shareholders'
Equity
$
840,000
$
840,000
$
$
$
Number
of Shares
Outstanding
40,000
2,000
42,000
Book Value
per
Share
$
21.00
$
20.00
(42,000)
798,000
(2,000)
40,000 $
19.95
63,000
861,000
2,000
42,000
42,000
84,000
861,000
(92,400)
768,600
525,000
1,293,600
84,000
84,000
$
20.50
$
10.25
$
9.15
15.40
Note to instru ctor: Prof it actually i ncreases book valu e throughout the year, n ot merely on the date
upon whi ch prof it is closed in to r etain ed earn in gs.
© The McGraw-Hill Companies, Inc., 2010
P12.4A
PROBLEM 12.5A
STRAIT CORPORATION
20 Minutes, Medium
STRAIT CORPORATION
Statement of Shareholders' Equity
For the Year Ended December 31, 20__
a.
Share Capital
($10 par
Share
Retained
Treasury
Premium
Earnings
Share
value)
$
1,100,000 $
1,765,000 $
950,000 $
Balances, J anuary 1, 20__
(80,000)
Prior period errors (net of income tax benefit)
100,000
240,000
Issuance of ordinary share; 10,000 shares @ 34
Declaration and dis tribution of 5% stock dividend
(6,000 shares at market price of 36 per share)
Purchased 1,000 treasury share @ 35
Sale of 500 treasury shares @ 36
Profit
Cas h dividends
B alances, December 31, 20__
(part
60,000
156,000
(216,000)
(35,000)
17,500
500
,
,
=SUM(f10.f18)
,
,
is on fo llowing page)
© The McGraw-Hill Companies, Inc., 2010
P12.5A
845,000
(142,700)
,
,
,
Total
Shareholders'
Equity
$
3,815,000
(80,000)
340,000
0
(35,000)
18,000
845,000
(142,700)
,
,
PROBLEM 12.5A
STRAIT CORPORATION (concluded)
b.
Declaration/distribution of a 5% stock dividend has no effect on total shareholders’ equity.
Declaration of a cash dividend reduces total shareholders’ equity by the amount of the
dividend.
The two types of dividends do not have the same impact upon shareholders’ equity. A cash
dividend is a distribution of a corporation’s assets (cash) to shareholders and, as such,
causes a decrease in shareholders’ equity. A stock dividend is simply issuing more share
certificates to the existing group of shareholders with no accompanying increase or
outflow of assets; a corporation’s own share is not an asset of the corporation. With both
small and large share dividends, shareholders’ equity is adjusted to reflect the increased
number of shares outstanding, but there is no additional equity created and no decrease in
equity.
© The McGraw-Hill Companies, Inc., 2010
P12.5A(p.2)
PROBLEM 12.6A
THOMPSON SERVICE
40 Minutes, Strong
a.
General Journal
2009
Jan
3 Dividends
Dividends Payable
To record declaration of $1 per share cash
dividend payable on Feb. 15 to shareholders of
record on Jan. 31
Feb
Apr
May
382,000
382,000
## Dividends Payable
Cash
To record payment of dividend declared Jan. 3.
382,000
## Treasury Share
Cash
Purchased 6,000 treasury share at $40
per share.
240,000
9 Cash
176,000
382,000
240,000
Treasury Share
160,000
16,000
Share Premium: Treasury Share
Sold 4,000 treasury share, which cost
$160,000, at a price of $44 per share.
June
Aug
1 Retained Earnings
Stock Dividend to Be Distributed
Share Premium: Stock Dividends
Declared a 5% stock dividend (19,000 shares) on
380,000 outstanding shares. Market price $42, par
value $1. To be distributed on June 30 to
shareholders of record.
798,000
## Stock Dividend to Be Distributed
Share Capital
Issued 19,000 shares of share capital as 5% stock
dividend.
19,000
4 Cash
22,200
1,800
Share Premium: Treasury Share
19,000
779,000
19,000
Treasury Share
24,000
Sold 600 shares of treasury share, which cost $24,000,
at a price of $37 per share.
Dec
Dec
## Income Summary
Retained Earnings
To close Income Summary account for the year.
## Retained Earnings
1,928,000
1,928,000
382,000
Dividends
382,000
To close Dividends account.
© The McGraw-Hill Companies, Inc., 2010
P12.6A
PROBLEM 12.6A
THOMPSON SERVICE (concluded)
b.
THOMPSON SERVICE
Partial Balance Sheet
December 31, 2009
Shareholders’ equity:
Share capital, $1 par value, 500,000 shares authorized,
$
401,000 shares issued, of which 1,400 are held in the treasury
Share premium:
From issuance of share capital
From stock dividend
From treasury share
Total issued and fully paid capital
Retained earnings*
$
4,202,000
779,000
14,200
$
Less: Treasury share, 1,400 shares at cost
Total shareholders’ equity
*Computation of retained earnings at Dec. 31, 2009:
Retained earnings at beginning of year
Add: Profit for the year
Subtotal
Less: Cash dividend declared Jan. 3
Stock dividend declared June 1
Retained earnings, Dec. 31, 2009
c.
$
$
$
Computation of maximum legal cash dividend
per share at Dec. 31, 2009:
Retained earnings at Dec. 31, 2009
Less: Restriction of retained earnings for
treasury share owned
Unrestricted retained earnings
Number of shares outstanding
(401,000 shares issued, minus 1,400 shares
held in treasury)
Maximum legal cash dividend per share ($3,396,600
divided by 399,600 shares)
© The McGraw-Hill Companies, Inc., 2010
P12.6A (p.2)
382,000
,
401,000
4,995,200
5,396,200
3,452,600
8,848,800
56,000
8,792,800
2,704,600
1,928,000
4,632,600
,
,
,
,
$
3,452,600
$
,
3,396,600
,
.
PROBLEM 12.7A
TECH PROCESS LIMITED
30 Minutes, Strong
a.
Event
Current
Assets
1
2
3
4
5
NE
D
D
I
NE
Shareholders’
Equity
D
NE
D
I
NE
Profit
NE
NE
NE
NE
NE
Net Cash Flow
(from Any
Source)
NE
D
D
I
NE
I = Increase
D = Decrease
NE = No effect
b.
1. Declaration of a cash dividend has no immediate effect upon profit or cash
flows. It increases current liabilities (dividends payable), but has no effect on
current assets. Also, retained earnings is decreased, resulting in a decrease in
shareholders’ equity.
2. Payment of a cash dividend has no effect on revenue or expenses, but it reduces cash. Since it
reduces cash, it also reduces current assets. The transaction has no effect on shareholders’
equity, which has already been decreased when the dividend was declared.
3. The purchase of treasury share has no effect on either revenue or expenses and,
therefore, does not affect profit. But cash is used to purchase the treasury
share, and this decreases cash and current assets. Because treasury share is
deducted from shareholders’ equity in the balance sheet, its purchase decreases
shareholders’ equity.
4. Reissuance of treasury share at a price less than its original cost results in a loss, but these
losses are not recorded in the income statement. Instead share premium is decreased for the
amount of the loss. Therefore, this transaction does not affect profit. Since the treasury share
account is deducted from shareholders’ equity, reissuance of the share increases the total
amount of shareholders’ equity. Also, both cash and current assets are increased as a result of
the cash received from sale of the share.
5. Declaration of a stock dividend results in a reclassification of amounts from Retained
Earnings to the Share Capital and Share Premium accounts. It has no effect on cash, current
assets, shareholders’ equity, or profit.
© The McGraw-Hill Companies, Inc., 2010
P12.7A
PROB
MANDELLA COR
50 Minutes, Strong
a.
MANDELLA CORPORATION
Partial Balance Sheet
December 31, 2008
Shareholders’ equity:
Share Capital:
Ordinary share, $10 par, 500,000 shares authorized,
150,000 shares issued, of which 10,000 are held
in the treasury
Stock dividend to be distributed (1)
Share premium:
From issuance of ordinary share
From stock dividend (2)
Total issued and paid capital
Retained earnings (3)
$
3,000,000
350,000
$
490,000
,
,
$
940,000
,
,
Less: Treasury share, 10,000 shares at cost of $34 per share
Total shareholders’ equity
(1)
(2)
(3)
(150,000 shares - 10,000 shares) x 10% = 140,000 shares
@$10 par
Total stock dividend (14,000 shares x $35)
Par value (14,000 shares x $10)
Share premium: stock dividend
Profit for 2008
Less: Stock dividend (14,000 shares x $35)
Retained earnings at end of 2008
b.
MANDELLA CORPORATION
Partial Balance Sheet
December 31, 2009
Shareholders’ e uit :
Share ca ital:
Ordinar share, $5 ar, 1,000,000 shares authorized,
328,000 shares issued and outstandin 1
Share remium:
From issuance of ordinar share
From stock dividend
From treasury share (2)
Total fully issued and paid capital
Retained earnings (3)
Total shareholders’ equity
(1)
(2)
(3)
3,000,000
350,000
,
150,000 shares +14,000 shares x 2 = 328,000 shares
@ $5 par
10,000 shares x ($39 reissuance price - $34 cost) = $50,000
Retained earnings at end of 2008
Profit for 2009
Subtotal
Less: Cash dividend 328,000 shares x $2
Retained earnings at end of 2009
© The McGraw-Hill Companies, Inc., 2010
P12.8A
$
$
450,000
1,080,000
1,530,000
656,000
874,000
EM 12.8A
ORATION
$
$
$
1,500,000
140,000
3,350,000
4,990,000
450,000
5,440,000
340,000
5,100,000
1,640,000
,
,
5,040,000
874,000
5,914,000
© The McGraw-Hill Companies, Inc., 2010
P12.8A
PROBLEM 12.9A
ESPER CORP.
25 Minutes, Strong
a.
ESPER CORP.
Partial Income Statement
For the Year Ended December 31, 20__
Loss from continuing operations
Profit from discontinued operations
Loss
(Dollars in
Thousands)
$
(24,516)
6,215
$
(18,301)
b.
Loss
Less: Preference share dividend requirements
Net loss applicable to ordinary shareholders
Weighted-average number of ordinary share
Loss per share ($21,079 ÷ 39,739)
© The McGraw-Hill Companies, Inc., 2010
P12.9A
$
(18,301)
(2,778)
(21,079)
39,739
(0.53)
30 Minutes, Easy
SOLUTIONS TO PROBLEMS SET B
PROBLEM 12.1B
PACIFIC AIRLINES
a.
PACIFIC AIRLINES
Income Statement
For the Year Ended December 31, 20__
Sales
Costs and expenses (including income taxes on
continuing and other items of operations)
Profit from continuing operations
Discontinued operations:
Operating profit from car rental (net of income tax)
Gain on sale of car rental business (net of income tax)
Profit
Earnings per ordinary share:
Earnin s from continuin o erations $4,340,000
4,000,000 shares)
Income from discontinued o erations $5,000,000
4,000,000 shares)
$
,
$
61,440,000
$
,
,
4,340,000
670,000
,
,
,

1.09

.
.
Net earnings ($9,340,000 ÷ 4,000,000 shares)
b.
,
,
Estimated net earnings per share next year:
Earnings per share from continuing operations
Estimated decrease ($1.87 x 10%)
Estimated net earnings per share next year
The profitability of the rental car operations is not
relevant, as these cars are no longer ow ned by
Pacific Airlines.
© The McGraw-Hill Companies, Inc., 2010
P12.1B
$
1.87
0.19
1.68
PROBLEM 12.2B
BEACH LIMITED
30 Minutes, Medium
a.
BEACH LIMITED
Condensed Income Statement
For the Year Ended December 31, 2009
Sales
Costs and expenses (including applicable income tax)
Income from continuing operations
Discontinued operations:
Operating income (net of income tax)
Loss on disposal (net of inco me tax benefit)
Profit
$
$
Earnings per share:
Earnings from continuing operations
[($15,900,000 - $600,000*) ÷ 200,000 shares]
$
37,400,000
21,500,000
15,900,000
$
(305,000)
15,595,000
205,000
(510,000)
$
Loss from discontinued operations ($305,000 ÷ 200,000 shares)
Net earnings
[($15,595,000 - $600,000 preference share dividends) ÷
200,000 shares]
*Preference share dividends: 100,000 shares x $6 = $600,000
© The McGraw-Hill Companies, Inc., 2010
P12.2B
$
76.500
(1.525)
74.975
PROBLEM 12.2B
BEACH LIMITED (concluded)
b.
BEACH LIMITED
Statement of Comprehensive Income
For the Year Ended December 31, 2009
Profit for the year
Less: Prior period error (net of income tax)
As restated
$
$
15,595,000
310,000
15,285,000
Subtotal
Other comprehensive income:
Loss on fair value change of available-for-sale securities
Total comprehensive income, December 31, 2009
$
15,285,000
c.
Total cash dividends declared during 2009 (data given)
Less: Preference stock dividend (100,000 shares x $6 per share)
Cash dividends to ordinary shareholders
Number of ordinary shares outstanding through 2009
Cash dividend per ordinary share ($1,400,000 ÷ 200,000 shares)
d.
(930,000)
14,355,000
$
2,000,000
600,000
1,400,000
200,000
7.00
The single 2010 $75.00 figure for EPS is unfavorable in comparison with 2009 performance.
Since 2010 has only one EPS figure, it should be compared to the earnings per share from
continuing operations in 2009, which amounted to $76.50 per share. Beach Limited’s
earnings per share from continuing operations fell $1.50 per share (2%) from 2009 to 2010.
© The McGraw-Hill Companies, Inc., 2010
P12.2B (p.2)
PROBLEM 12.3B
DEXTER LIMITED
35 Minutes, Strong
a.
DEXTER LIMITED
Income Statement
For the Year Ended December 31, 2009
Sales
Costs and expenses:
Cost of goods sold
Selling expenses
General and administrative expenses
Loss from settlement of litigation
Income tax on continuing operations
Profit from continuing operations
Discontinued operations:
Operating loss on discontinued operations (net of
income tax benefit)
Loss on disposal of discontinued operations (net of
income tax benefit)
Profit
Earnings per share on ordinary share:
Earnin s from continuin o erations $3,688,000
500,000 shares)
Loss from discontinued o erations $420,000 
500,000 shares)
Net earnin s $3,268,000 500,000 shares
$
$

© The McGraw-Hill Companies, Inc., 2010
P12.3B
$
10,200,000
$
6,512,000
3,688,000
4,000,000
1,050,000
840,000
10,000
612,000
(180,000)
(240,000)
(420,000)
3,268,000
7.38
.
.
PROB
DEXTER LIMITED (c
b.
DEXTER LIMITED
Statement of Comprehensive Income
For the Year Ended December 31, 2009
Profit for the year
Add: Prior period error (net of income tax)
As restated
Other comprehensive income:
Gain on fair value changes of available-for-sale financial assets, net of tax
Total comprehensive income, December 31, 2009
c.
The “gain on sale of treasury share” represents the excess of reissue price received ove
Dexter paid to acquire some of its own shares. Although a corporation may reissue tre
prices above or below its cost of acquiring its own share, the difference between amou
the cost of treasury shares does not result in gains or losses recognized in the income s
Rather, the amount described as “gain on sale of treasury share” is included as part o
in the shareholders’ equity section of the balance sheet.
© The McGraw-Hill Companies, Inc., 2010
P12.3B (p.2)
EM 12.3B
oncluded)
$
$
3,268,000
80,000
3,348,000
$
110,000
$
3,458,000
r the cost
asury share at
ts received and
atement.
share premium
© The McGraw-Hill Companies, Inc., 2010
P12.3B (p.2)
PROBLEM 12.4B
JESSEL LIMITED
20 Minutes, Easy
Beginning balance
Jan. 16 Declared and distributed 5% stock d iv.
Balance
Acquired 300 shares of treasury share
Feb. 9
at cost of $55.00 per share
Balance
Reissued 300 shares of treasury share
Mar. 3
at price of $65.00 per share
Balance
Jul. 5
Share capital split 2-for-1
Balance
Nov. 22 Declared $6.00 per share cash dividend
Balance
Dec. 31 Profit
Balance
Total
Shareholders'
Equity
$
600,000
Number
Book Value
of Shares
per
Outstanding Share (rounded)
20,000 $
30.00
1,000
21,000 $
28.57
$
600,000
$
(16,500)
583,500
(300)
20,700 $
$
19,500
603,000
300
21,000
21,000
42,000
$
603,000
(252,000)
351,000
87,000
438,000
42,000
42,000
28.19
$
28.71
$
14.36
$
8.36
10.43
Note to instru ctor: Prof it actually i ncreases book valu e throughout the year, n ot merely on the date
upon whi ch prof it is closed in to r etain ed earn in gs.
© The McGraw-Hill Companies, Inc., 2010
P12.4B
PROBLEM 12.5B
DRY WALL LIMITED
20 Minutes, Medium
DRY WALL LIMITED
Statement of Shareholders' Equity
For the Year Ended December 31, 20__
a.
Share Capital
($1 par
Share
Retained
Treasury
Premium
Earnings
Share
value)
$
130,000 $
1,170,000 $
1,400,000 $
Balances, J anuary 1, 20__
(47,000)
Prior period adjustment (net of income tax benefit)
20,000
280,000
Issuance of ordinary share; 20,000 shares @ 15
Declaration and distribution of 10% stock dividend
15,000
(15,000 shares at market price of 17 per share)
Purchased 3,000 shares of treasury share @ 16
Sale of 1,000 treasury shares @ 18
Profit
Cash dividends ( 1 per share)
165,000
B alances, December 31, 20__
=SUM(f10.f18)
(part
240,000
(255,000)
(48,000)
16,000
2,000
1,692,000
is on fo llowing page)
© The McGraw-Hill Companies, Inc., 2010
P12.5B
1,200,000
(163,000)
2,135,000
(32,000)
Total
Shareholders'
Equity
$
2,700,000
(47,000)
300,000
0
(48,000)
18,000
1,200,000
(163,000)
3,960,000
PROBLEM 12.5B
DRY WALL LIMITED (concluded)
b.
Declaration/distribution of a 10% stock dividend has no effect on total shareholders’
equity. Declaration of a cash dividend reduces total shareholders’ equity by the amount of
the dividend.
The two types of dividends do not have the same impact upon shareholders’ equity. A cash
dividend is a distribution of a corporation’s assets (cash) to shareholders and, as such,
causes a decrease in shareholders’ equity. A stock dividend is simply issuing more share
certificates to the existing group of shareholders with no accompanying increase or
outflow of assets; a corporation’s own share is not an asset of the corporation. With both
small and large stock dividends, shareholders’ equity is adjusted to reflect the increased
number of shares outstanding, but there is no additional equity created and no decrease in
equity as occurs when a cash dividend is declared.
© The McGraw-Hill Companies, Inc., 2010
P12.5B(p.2)
PROBLEM 12.6B
GREENE LIMITED
40 Minutes, Strong
a.
General Journal
2009
Jan
5 Dividends
Dividends Payable
To record declaration of $1 per share cash
dividend payable on Feb. 18 to shareholders of
record on Jan. 31.
Feb
Apr
May
## Dividends Payable
Cash
To record payment of dividend declared Jan. 5
## Treasury Share
Cash
Purchased 1,000 shares of treasury share at $10
per share.
## Cash
560,000
560,000
560,000
560,000
10,000
10,000
6,000
Treasury Share
5,000
1,000
Share Premium: Treasury Share
Sold 500 shares of treasury share, which cost
$5,000, at a price of $12 per share.
June
Aug
## Retained Earnings
Stock Dividend to Be Distributed
Share Premium: Stock Dividends
Declared a 5% stock dividend (27,975 shares) on
559,500 outstanding shares. Market price $11, par
value $1. To be distributed on June 30 to
shareholders of record at June 22.
307,725
## Stock Dividend to Be Distributed
Share capital
Issued 27,975 shares of share capital as 5% share
dividend declared June 15.
27,975
## Cash
Share Premium: Treasury Share
27,975
279,750
27,975
2,925
75
Treasury Share
3,000
Sold 300 shares of treasury share, which cost $3,000,
at a price of $9.75 per share.
Dec
Dec
31 Income Summary
Retained Earnings
To close Income summary account for the year.
31 Retained Earnings
1,750,000
1,750,000
560,000
Dividends
560,000
To close Dividends account.
© The McGraw-Hill Companies, Inc., 2010
P12.6B
PROBLEM 12.6B
GREENE LIMITED (concluded)
b.
GREENE LIMITED
Partial Balance Sheet
December 31, 2009
Shareholders’ equity:
Share Capital, $1 par value, 1,000,000 shares authorized,
$
587,975 shares issued, of which 200 are held in the treasury
Share premium:
From issuance of share capital
From stock dividend
From treasury share
Total issued and fully paid capital
Retained earnings*
$
4,480,000
279,750
925
$
$
Less: Treasury share, 200 shares at cost
Total shareholders’ equity
*Computation of retained earnings at Dec. 31, 2009:
Retained earnings at beginning of year
Add: Profit for year
Subtotal
Less: Cash dividend declared Jan. 3
Stock dividend declared June 1
Retained earnings, Dec. 31, 2009
c.
$
$
$
Computation of maximum legal cash dividend
per share at Dec. 31, 2009:
Retained earnings at Dec. 31, 2009
Less: Restriction of retained earnings for
treasury share owned
Unrestricted retained earnings
Number of shares outstanding
(587,975 shares issued, minus 200 shares
held in treasury)
Maximum legal cash dividend per share ($3,880,275
divided by 587,775 shares)
© The McGraw-Hill Companies, Inc., 2010
P12.6B (p.2)
587,975
4,760,675
5,348,650
3,882,275
9,230,925
2,000
9,228,925
3,000,000
1,750,000
4,750,000
560,000
,
,
,
,
$
3,882,275
$
,
3,880,275
,
.
PROBLEM 12.7B
HOT WATER LIMITED
30 Minutes, Strong
a.
Event
Current
Assets
1
2
3
4
5
NE
D
D
I
NE
Shareholders’
Equity
D
NE
D
I
NE
Profit
NE
NE
NE
NE
NE
Net Cash Flow
(from Any
Source)
NE
D
D
I
NE
I = Increase
D = Decrease
NE = No effect
b.
1.
Declaration of a cash dividend has no immediate effect upon profit or cash
flows. It increases current liabilities (dividends payable), but has no effect on
current assets. Also, retained earnings is decreased, resulting in a decrease in
shareholders’ equity.
2.
Payment of a cash dividend has no effect on revenue or expenses, but it reduces cash. Since it
reduces cash, it also reduces current assets. The transaction has no effect on shareholders’
equity, which has already been decreased when the dividend was declared.
3.
The purchase of treasury share has no effect on either revenue or expenses and,
therefore, does not affect profit. But cash is used to purchase the treasury
share, and this decreases cash and current assets. Because treasury share is
deducted from shareholders’ equity in the balance sheet, its purchase decreases
shareholders’ equity.
4.
Reissuance of treasury share at a price less than its original cost results in a loss, but these
losses are not recorded in the income statement. Instead share premium is decreased for the
amount of the loss. Therefore, this transaction does not affect profit. Since the treasury share
account is deducted from shareholders’ equity, reissuance of the share increases the total
amount of shareholders’ equity. Also, both cash and current assets are increased as a result of
the cash received from sale of the share.
5.
Declaration of a stock dividend results in a reclassification of amounts from Retained
Earnings to the Share Capital and Share Premium accounts. It has no effect on cash, current
assets, shareholders’ equity, or profit.
© The McGraw-Hill Companies, Inc., 2010
P12.7B
PROB
ADAMS COR
50 Minutes, Strong
a.
ADAMS CORPORATION
Partial Balance Sheet
December 31, 2008
Shareholders’ equity:
Share capital:
Ordinary share, $1 par, 100,000 shares authorized,
20,000 shares issued, 16,000 shares outstanding
Stock dividend to be distributed (1)
Share premium:
From issuance of ordinary share
From stock dividend (2)
Total issued and fully paid capital
Retained earnings (3)
$
480,000
48,000
Less: Treasury share, 4,000 shares at cost of $30 per share
Total shareholders’ equity
(1)
(2)
(3)
(20,000 shares - 4,000 shares) x 10% = 16,000 shares
@$1 par
Total stock dividend (1,600 shares x $31)
Par value (1,600 shares x $1)
Share premium: stock dividend
Profit for 2008
Less: Stock dividend (1,600 shares x $31)
Retained earnings at end of 2008
$
$
49,600
(1,600)
48,000
$
850,000
,
,
$
480,000
48,000
,
.
ADAMS CORPORATION
Partial Balance Sheet
December 31, 2009
Shareholders’ e uit :
Share ca ital:
Ordinar share, $.50 ar, 200,000 shares authorized,
43,200 shares issued and outstandin 1
Share remium:
From issuance of ordinar share
From stock dividend
From treasur share 2
Total issued and full aid ca ital
Retained earnin s 3
Total shareholders’ e uit
1
2
3
20,000 shares + 1,600 shares x 2 = 43,200 shares
$.50 ar
4,000 shares x ($35 reissuance price - $30 cost) = $20,000
Retained earnin s at end of 2008
Profit for 2009
Subtotal
Less: Cash dividend 43 200 shares x $1
Retained earnings at end of 2009
© The McGraw-Hill Companies, Inc., 2010
P12.8B
800,400
,
1,610,400
,
,
,
EM 12.8B
ORATION
$
$
$
20,000
1,600
528,000
549,600
800,400
1,350,000
120,000
1,230,000
$
21,600
$
,
569,600
,
,
,
,
© The McGraw-Hill Companies, Inc., 2010
P12.8B
PROBLEM 12.9B
25 Minutes, Strong
BLUE JAY MANUFACTURING
CORP.
a.
BLUE JAY MANUFACTURING CORPORATION
Partial Income Statement
For the Year Ended December 31, 20__
Loss from continuing operations
Profit from discontinued operations
Loss
(Dollars in
ousan s
$
(28,220)
12,000
(16,220)
b.
Loss
Less: Preference share dividend requirements
Net loss applicable to ordinary shareholders
Weighted-average number of ordinary share
Loss per share ($16,220 ÷ 10,000)
© The McGraw-Hill Companies, Inc., 2010
P12.9B
$
$
$
(16,220)
(3,100)
(19,320)
10,000
1.622
SOLUTIONS TO CRITICAL THINKING CASES
CASE 12.1
WHAT'S THIS?
20 Minutes, Easy
a. Both the operating profit from the Indian mobile telecommunications operations and the
disposal gain should be classified in HTIL’s income statement as discontinued operations and
should be shown separately from the results of HTIL’s ongoing business operations. These
gains qualify for this separate treatment because the discontinued activities represented an
entire identifiable segment of HTIL’s business operations.
b. Acquisition of a new entity affect only the current year and future years, and are included in
revenues and expenses from normal operations.
c.
The settlement of the court case by Cathay Pacific is classified in normal and recurring
business operations.
d. Liquidation of Shiseido Beautech Co., Ltd. is classified as discontinued operation because
Shiseido Beautech will no longer be able to operate its business.
© The McGraw-Hill Companies, Inc., 2010
Case 12.1
20 Minutes, Medium
CASE 12.2
IS THERE LIFE WITHOUT BASEBALL?
a.
If JPL had not sold the baseball team at the end of 2009, it still would have incurred the team’s
$1,300,000 operating loss for the year. However, the company would not have realized the $4,700,000
gain on the sale. Other items in the income statement would not have been affected. Thus, JPL’s income
for 2009 would have been $4,700,000 less than was actually reported, or $2,600,000 ($7,300,000
$4,700,000 = $2,600,000).
b.
In 2009, JPL’s newspaper business earned $3,900,000, as shown by the subtotal, Profit from Continuing
Operations. If the profitability of these operations increased by 7% in 2010, they would earn
approximately $4,173,000 ($3,900,000 x 1.07 = $4,173,000). If the baseball team were still owned and
lost $2,000,000 in 2010, JPL could be expected to earn a profit of about $2,173,000 in that year.
c.
Given that the baseball team was sold in 2009, JPL should earn a profit of approximately $4,173,000 in
2010, assuming that the profitability of the continuing newspaper operations increases by 7%
($3,900,000 x 1.07 = $4,173,000).
d.
The operating loss incurred by the baseball team in 2009 indicates that the team’s expenses (net of tax
effects) exceeded its revenue by $1,300,000. If the expenses were $32,200,000, the revenue must have
amounted to $1,300,000 less, or $30,900,000.
© The McGraw-Hill Companies, Inc., 2010
Case 12.2
30 Minutes, Strong
a.
C
USING EARNINGS PER SHARE STA
The company reports earnings per share computed on both a basic and a diluted basis b
outstanding convertible preference share. The conversion of these
securities into ordinary share would increase the number of ordinary shares outstanding
dilute (reduce) earnings per share of ordinary share. The primary purpose of a company
diluted earnings per share is to warn investors of the dilution in earnings that could occu
convertible securities actually were converted.
It is important to recognize that diluted earnings represent a hypothetical case. The conv
securities have not actually been converted into ordinary shares as of the close of the cur
b.
The total dollar amount of the company’s loss from discontinued operations can be comp
the earnings per share information as follows:
Loss
from discontinued operations per share ($6.90 $3.60) ………………………………
Total loss from discontinued operations ($3.30 per share x 3 million shares) ……………
c.
d.
The approximate market price of the company’s ordinary share is $69 per share. When
income statement includes an extraordinary item, the price-earnings ratio shown in new
based upon basic earnings before extraordinary items ($6.90 x 10 = $69).
(1)
$7.59 ($6.90 x 110%)
Only the continuing operations will be earning revenue and incurring expenses ne
the extraordinary item is not expected to recur. Therefore, the starting point for p
future net earnings should be earnings from continuing operations. Since both rev
expenses are expected to increase by 10%, earnings per share also should increase
(2)
$6.05 ($5.50 x 110%)
The diluted earnings per share figures show the effect that conversion of all of the
preference share into ordinary shares would have had upon this year’s earnings. E
share from continuing operations would have been only $5.50, rather than $6.90.
per share becomes the logical starting point for forecasting next year’s net earnin
(1), next year’s earnings are expected to rise by 10% over those of the current year
© The McGraw-Hill Companies, Inc., 2010
Case 12.3
SE 12.3
ISTICS
cause it has
and thereby
’s disclosing
r if the
ertible
ent year.
uted from
$3.30
$9,900,000
company’s
papers is
t year, and
ojecting
enue and
10%.
convertible
arnings per
hus, $5.50
s. As in part
.
© The McGraw-Hill Companies, Inc., 2010
Case 12.3
35 Minutes, Strong
CASE 12.4
INTERPRETING A STATEMENT OF
CHANGES IN EQUITY
a.
Beginning of year: 77,987,500 shares outstanding (82,550,000 issued 4,562,500 held in
treasury)
End of year: 77,353,100 shares outstanding (82,550,000 issued 5,196,900 treasury
shares)
b.
$95,700,000 total di vidend declar ed on ordi nar y shar e
77,804,878 approxi mate nu mber of shar es enti tl ed to $1.23 per stock di vidend ($95,700,000 ¸
$1.23 per share)
This answer appears reasonable, since the number of ordinary shares outstanding
ranged from 77,987,500 at the beginning of the year to 77,353,100 at year-end. The
77,804,878 approximate figure for the $1.23 annual dividend appears compatible with the
beginning and ending actual figures because it falls between these numbers.
c.
The share issued during the year for the share option plans consisted of treasury shares, not
newly issued shares. The Treasury Share account is used to account for repurchases of a
corporation’s share, as well as the reissuance of treasury shares. When share is repurchased
and subsequently reissued, the Ordinary Share account is not affected; these transactions do,
however, affect the Treasury Share account, a contra- shareholders’ equity account.
d.
$29.79 average cost per shar e of tr easur y shar e at the begin ni ng of the year
($135,900,000 total cost  4,562,500 treasury shares)
e.
The aggregate reissue price for the treasury shares must have been lower than the cost to
acquire those treasury shares, because the Share Premium account was reduced by the
reissuance of the treasury share. The cost of the treasury shares reissued was $16,700,000;
the reissue price for the treasury shares must have been $15,300,000 to cause a $1,400,000
reduction in Share Premium.
f.
$63.61 average cost per shar e for t reasur y shar e acquir ed dur ing the cur rent year
($78,600,000 aggregate cost  1,235,700 shares repurchased)
g.
Earnings per share: Divide by the weighted-average number of shares outstanding
throughout the year
Book value per share: Divide by the actual number of shares outstanding as of the specific
date (usually a balance sheet date)
© The McGraw-Hill Companies, Inc., 2010
Case 12.4
CASE 12.5
60 Minutes, Strong
CLASSIFICATION OF UNUSUAL ITEMS—
AND THE POTENTIAL FINANCIAL IMPACT
a.
An asset represents something with fu tur e economic benefit. But if the amount at which
the asset is presented in the balance sheet (i.e., its book value) cannot be recovered
through future use or sale, any future economic benefit appears to be less than the
asset’s current book value. In such cases, the asset should be written down to the
recoverable amount.
b.
According to IFRS, no extraordinary item should be disclosed in the financial statements.
c.
1.
Profit will be reduced since there is no extraordinary loss allowed in IFRS.
2.
Income before extraordinary items will be reduced since the losses are classified as ordinary.
3.
Income from Continuing Operations will be reduced as the losses are classified as ordinary.
4.
Given that these losses do not affect income taxes, they have no cash effects. Therefore, net cash
flow from operating activities will be unaffected.
d.
The p/e ratio is based upon income before extraordinary items (stated on a per-share basis). As stated in
c (2), above, income before extraordinary items will be affected since the losses are classified as part of
the ordin ary operations. Therefore, the p/e ratio will be higher.
e.
Yes. Members of management have a self-interest in seeing share prices increase, which would
favorably affect the value of their share options as well as share they already own. In addition, a rising
share price makes it easier for the company to raise capital, benefits shareholders, and makes
management look good.
© The McGraw-Hill Companies, Inc., 2010
Case 12.5
CASE 12.5
CLASSIFICATION (continued)
The classification of these losses may well affect Elliot-Cole’s share price. Investors
consider income from continuing operations a predictive subtotal. If the losses are
classified as ordinary, this key subtotal will decline, probably below last year’s level.
(The losses amount to 18% of pre-loss earnings, which exceeds the company’s normal
earnings growth of 15%. Thus, these losses may be sufficient to cause a decline in
earnings relative to the preceding year.) This could have an adverse effect on share
price.
In summary, the adverse effects of these losses on the company’s share price are likely
to be greater if the losses are classified as ordinary. Therefore, management has a self-interest in seeing
these losses classified as an extraordinary item.
f.
These write-offs are likely to increase the earnings reported in future periods, especially if the company
continues to do business in any of the related countries. With the assets having no book value, future
earnings from these operations will not be reduced by charges for depreciation (or, in some cases, for a
cost of goods sold).
g.
No ethical dilemma exists because the classification of these losses as extraordinary is not allowed.
Note to in stru ctor: This case is adapted from an incident involving an international pharmaceutical
company. The details of the situation have been altered for the purpose of creating an introductory level
textbook assignment, and the so-called quotations from corporate officers are entirely fictitious.
Nonetheless, we believe that the outcome of the actual event provides insight into the financial reporting
process and also to the importance that investors attach to the various computations of earnings per share.
© The McGraw-Hill Companies, Inc., 2010
Case 12.5 (p.2)
CASE 12.5
CLASSIFICATION (concluded)
Management originally classified the losses as extraordinary, and the auditors concurred. The SEC,
however, did not agree. It insisted that the corporation revise and reissue its financial statement—with the
controversial items classified as ordinary operating losses. When the company announced the
reclassification of these losses, its share price fell substantially—despite the fact that the reported amount of
profit remained unchanged.
Who were the losers? Anyone who bought the share between the release of the original earnings figures and
the announcement that substantial losses would be reclassified.
© The McGraw-Hill Companies, Inc., 2010
Case 12.5 (p.3)
30 Minutes, Medium
SHAREHOLDERS' E
The following answers are based on information from March 29, 2010 (part a.)
financial statements for the remaining parts.
a. On March 29, 2010, Vodafone's share sold for a high of 151.75p and a low
amounts will vary for other dates.
b. The number of ordinary shares outstanding on Mar. 31, 2009 was 57,806,28
were originally sold by the company for the total of the par value of the shares
premium:
Par value
Share premium
£4,153,000,000
£43,008,000,000
£47,161,000,000
The average price at which the shares were sold is computed as follows:
£43,008 million
£47,161,000,000 / 57,806,283,716 shares = £0.82 per share
c. There is no direct relationship between the amount the share originally sold
current market price of the share. The original price at which the share was so
amount that represents the investment of owners in the company while the cur
reflects a number of factors, including the long-term performance of the comp
factors directly and indirectly related to the company's performance.
d. The three-year trend in basic earnings per share (EPS), including discontinu
negative £9.7 (2007), £12.56 (2008), and £5.84 (2009). Discontinued operations
2009 and 2008, and had the most significant impact on EPS in 2007 when it acc
£.76 per share of a net amount of negative £9.7 of earnings per share.
e. The average number of shares used to compute basic EPS in 2009 was 52,73
different from the 57,806,283,716 because the number of shares outstanding de
year. The year-end figure is in the balance sheet while a weighted average nu
computing EPS.
© The McGraw-Hill Companies, Inc., 2010
Case 12.6
CASE 12.6
QUITY AND EPS
INTERNET
and 2009 annual
f 148.00p. These
3,716. These shares
lus the share
or (£.82) and the
d is a historical
ent market price
ny and many other
ed operations, is
did not occur in
ounts for a loss of
,00,000. This is
creased during the
ber is used in
© The McGraw-Hill Companies, Inc., 2010
Case 12.6