TB 17

CHAPTER 17
EARNINGS PER SHARE

CHAPTER STUDY OBJECTIVES
1. Understand why earnings per share (EPS) is an important number. Earnings per share
numbers give common shareholders an idea of the amount of earnings that can be attributed to
each common share. This information is often used to predict future cash flows from the shares
and to value companies.
2. Understand when and how earnings per share must be presented, including related
disclosures. Under IFRS, EPS must be presented for all public companies or companies that
are intending to go public. The calculations must be presented on the face of the income
statement for net income from continuing operations and net income (for both basic EPS and
diluted EPS in the case of complex capital structures). When there are discontinued operations,
the per share impact of these items must also be shown, but it can be shown either on the face
of the income statement or in the notes. Comparative calculations must also be shown.
3. Calculate earnings per share for companies with a simple capital structure. Basic
earnings per share is an actual calculation that takes income available to common shareholders
and divides it by the weighted average number of common shares outstanding during the
period.
4. Calculate earnings per share for companies with a complex capital structure. Diluted
earnings per share is a “what if” calculation that considers the impact of potential common
shares. Potential common shares include convertible debt and preferred shares, options and
warrants, contingently issuable shares, and other instruments that may result in additional
common shares being issued by the company. They are relevant because they may cause the
present interests of the common shareholders to become diluted.
The if-converted method considers the impact of convertible securities such as convertible debt
and preferred shares. It assumes that the instruments are converted at the beginning of the year
(or issue date, if later) and that any related interest or dividend is thus avoided.
The treasury stock method looks at the impact of written call options on EPS numbers. It
assumes that the options are exercised at the beginning of the year and that the money from
the exercise is used to buy back shares in the open market at the average common share price.
The reverse treasury stock method looks at the impact of written put options. It assumes that
the options are exercised at the beginning of the year and that the company first issues shares
in the market (at the average share price) to obtain sufficient funds to buy the shares under the
option.
Antidilutive potential common shares are irrelevant since they would result in diluted EPS
calculations that are higher than the basic EPS. Diluted EPS must show the worst possible EPS
number. Note that purchased options and written options that are not in the money are ignored
for purposes of calculating diluted EPS because they are either antidilutive or will not be
exercised.
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17 - 2 Test Bank for Intermediate Accounting, Eleventh Canadian Edition
5. Understand how analysis helps users of financial statements assess performance.

EPS is one of the most commonly used metrics for assessing performance. Diluted EPS is
especially important because it allows for the effects of potential dilution. The price earnings
ratio is often used to value companies.
6. Identify the major differences in accounting between ASPE and IFRS, and what
changes are expected in the near future. ASPE does not prescribe accounting standards for
EPS. The IASB and FASB were working on a revised plan of action to study the issues. At the
time of writing, work on the project was paused.
Earnings Per Share 17 - 3
MULTIPLE CHOICE—Conceptual
Answer No. Description
c 1. Objective of EPS
c 2. EPS presentation
b 3. Basic and Diluted EPS
d 4. EPS disclosure
c 5. Simple capital structure
a 6. Calculating basic EPS
d 7. Weighted average of common shares outstanding
c 8. Contingently issuable shares
a 9. IFRS nomenclature
d 10. Choose incorrect statement.
b 11. Effect of dividends on non-convertible preferred shares
c 12. Effect of treasury shares on EPS
d 13. Diluted EPS
b 14. Dilutive convertible securities
a 15. Cumulative convertible preferred shares effect on EPS
d 16. Treasury stock method
a 17. Treasury stock method
b 18. Treasury stock method
d 19. Antidilutive securities
d 20. EPS calculation with two dilutive convertible securities
b 21. Reverse treasury stock method.
b 22. Choose correct statement.
a 23. "If-converted" method
c 24. EPS analysis
a 25. EPS valuation
d 26. IFRS vs ASPE
b 27. Challenges for standard setters
MULTIPLE CHOICE—Computational
c 28. Calculate basic EPS.
b 30. Calculate weighted average of common shares outstanding.
b 31. Calculate basic EPS.
c 32. Calculate basic EPS with non-convertible preferred shares.
b 35. Calculate denominator for basic and diluted EPS with convertible bonds.
b 36. Calculate denominator for basic and diluted EPS with convertible bonds.
a 37. Calculate denominator for basic and diluted EPS with convertible bonds.
b 39. Calculate diluted EPS with convertible bonds.
c 40. Calculate diluted EPS with convertible bonds.
c 42. Calculate diluted EPS with convertible preferred shares.
Copyright © 2016John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
MULTIPLE CHOICE—Computational (Cont’d)

c 43. Calculate diluted EPS with convertible bonds and convertible preferred
shares.
b 44. Calculate diluted EPS with convertible preferred shares.
b 46. Calculate diluted EPS with convertible preferred shares and convertible
bonds.
d 47. Use of treasury stock method with outstanding warrants
b 48. Calculate denominator for diluted EPS with outstanding stock options.
b 49. Calculate denominator for diluted EPS with call options.
d 50. Calculate diluted EPS.
EXERCISES
Item Description
E17-51 EPS Calculations
E17-52 EPS Disclosures under IFRS
E17-53 EPS Presentation
E17-54 Weighted average of common shares outstanding
E17-55 Earnings per share (definitions)
E17-56 Basic and diluted earnings per share
E17-57 Basic and diluted earnings per share
E17-58 Effect of dilutive securities on earnings per share calculations
E17-59 Diluted earnings per share
E17-60 Company Valuation using EPS
E17-61 Assessing performance using EPS
PROBLEMS
Item Description
P17-62 Weighted average calculations
P17-63 Basic earnings per share
P17-64 Diluted earnings per share
P17-65 Basic and diluted earnings per share
MULTIPLE CHOICE—Conceptual
1. EPS is important to common shareholders for all of the following reasons, EXCEPT
a) it indicates the amount of income that is earned by each common share.
b) common shareholders have a residual interest in the company.
c) it is an indicator of cumulative dividend payments.
d) it is an indicator of the amount of income earned by each share.
Answer: c
Difficulty: Easy
Learning Objective: Understand why earnings per share (EPS) is an important number.
Section Reference: Objective of EPS
CPA: Financial Reporting
Bloomcode: Knowledge
2. EPS is normally
a) on the income statement of privately held and publicly traded corporations.
b) in the notes to the financial statements.
c) not a requirement under ASPE.
d) provided at the discretion of management.
Answer: c
Difficulty: Easy
3. Diluted EPS is only required when

a) a company has discontinued operations.
b) there is a complex capital structure.
c) basic EPS can’t be calculated.
d) a company uses ASPE.
Answer: b
Difficulty: Easy
Learning Objective: Understand when and how earnings per share must be presented, including
related disclosures.
Section Reference: Presentation and Disclosure
4. Standard setters require the EPS calculation be included

a) only when there is a complex capital structure.
b) under both IFRS and ASPE.
c) when is an indicator of cumulative dividend payments.
d) for all publicly traded companies.
Answer: d
Difficulty: Easy
5. With respect to the calculation of earnings per share, which of the following would suggest a
simple capital structure?
a) common shares and convertible bonds
b) earnings derived from one primary line of business
c) common shares and non-convertible preferred shares
d) common shares and convertible preferred shares
Answer: c
Difficulty: Easy
Learning Objective: Calculate earnings per share for companies with a simple capital structure.
Section Reference: Capital Structure
6. In calculating basic earnings per share, if the preferred shares are cumulative, the amount
that should be deducted as an adjustment to the numerator is the
a) annual preferred dividend.
b) preferred dividends in arrears.
c) annual preferred dividend times (one minus the income tax rate).
d) preferred dividends in arrears times (one minus the income tax rate).
Answer: a
Difficulty: Medium
7. In calculating the weighted average of common shares outstanding, when a stock dividend or
stock split occurs, the additional shares are
a) ignored.
b) weighted by the number of months outstanding.
c) considered outstanding at the beginning of the year.
d) considered outstanding at the beginning of the earliest year reported.
Answer: d
Difficulty: Medium
8. When a corporation agrees to issue common shares if some specific future event occurs,
such shares are known as
a) potential treasury shares.
b) potential common shares.
c) contingently issuable shares.
d) convertible common shares.
Answer: c
Difficulty: Medium
9. Under IFRS, common shares are also called

a) ordinary shares.
b) potential shares.
c) treasury shares.
d) non-dilutive shares.
Answer: a
Difficulty: Easy
10. Which of the following statements is INCORRECT?

a) Options that are out of the money are ignored in earnings per share calculations.
b) The treasury stock method is used for written call options.
c) Corporations that have only antidilutive securities are not permitted to increase their earnings
per share and are required to report only basic earnings per share.
d) Contingently issuable shares are never included in diluted earnings per share calculations.
Answer: d
Difficulty: Medium
11. In calculating diluted earnings per share, dividends on non-convertible cumulative preferred
shares should be
a) ignored.
b) deducted from net income whether declared or not.
c) deducted from net income only if declared.
d) added back to net income whether declared or not.
Answer: b
Difficulty: Easy
12. What effect will the acquisition of treasury shares have on shareholders' equity and basic
earnings per share, respectively?
Shareholders equity Basic EPS
a) decrease no effect
b) increase no effect
c) decrease increase
d) increase decrease
Answer: c
Difficulty: Medium
Learning Objective: Calculate earnings per share for companies with a complex capital
structure.
Section Reference: Complex Capital Structure
Bloomcode: Comprehension
13. When calculating diluted earnings per share, convertible bonds are
a) ignored.
b) assumed converted whether they are dilutive or antidilutive.
c) assumed converted only if they are antidilutive.
d) assumed converted only if they are dilutive.
Answer: d
Difficulty: Easy
structure.
14. Dilutive convertible securities must be used in the calculation of

a) basic earnings per share only.
b) diluted earnings per share only.
c) diluted and basic earnings per share.
d) silly question: such securities are never included.
Answer: b
Difficulty: Easy
structure.
15. In calculating diluted earnings per share, the equivalent number of convertible preferred
shares is added as an adjustment to the denominator. If the preferred shares are cumulative,
which amount should then be added as an adjustment to the numerator?
a) annual preferred dividend
b) annual preferred dividend times (one minus the income tax rate)
c) annual preferred dividend times the income tax rate
d) annual preferred dividend divided by the income tax rate
Answer: a
Difficulty: Medium
structure.
16. In calculating diluted earnings per share, the treasury stock method is used for written call
options and equivalents to reflect assumed reacquisition of common shares at the average
market price during the period. If the exercise price of the options or warrants exceeds the
average market price, the calculation would
a) fairly present diluted earnings per share on a prospective basis.
b) fairly present the maximum potential dilution of diluted earnings per share on a prospective
basis.
c) reflect the excess of the number of shares assumed issued over the number of shares
assumed reacquired as the potential dilution of earnings per share.

d) be antidilutive.
Answer: d
Difficulty: Medium
structure.
17. In applying the treasury stock method to determine the dilutive effect of options and
warrants, the proceeds assumed to be received upon exercise of the options and warrants
a) are used to calculate the number of common shares repurchased at the average market
price, when calculating diluted earnings per share.
b) are added, net of tax, to the numerator of the calculation for diluted earnings per share.
c) are disregarded in the calculation of earnings per share if the exercise price of the options
and warrants is less than the ending market price of common shares.
d) are not included in the calculation.
Answer: a
Difficulty: Medium
structure.
18. When applying the treasury stock method, the price of the common shares used for the
assumed repurchase is the
a) market price at the end of the year.
b) average market price during the year.
c) market price at the beginning of the year.
d) market price at the time the options or warrants were granted.
Answer: b
Difficulty: Medium
structure.
19. Antidilutive securities

a) should be included in the calculation of diluted earnings per share but not basic earnings per
share.
b) are those whose inclusion in earnings per share calculations would cause basic earnings per
share to exceed diluted earnings per share.
c) include call options and warrants whose exercise price is less than the average market price
of common shares.
d) should be ignored in all earnings per share calculations.
Answer: d
Difficulty: Easy
structure.
20. Assume a corporation has two potentially dilutive convertible securities outstanding. The
one that should be used first to calculate diluted earnings per share is the security with the
a) greater earnings adjustment.
b) greater earnings per share adjustment.
c) smaller earnings adjustment.
d) smaller earnings per share adjustment.
Answer: d
Difficulty: Hard
structure.
21. The reverse treasury stock method is used for

a) written call options.
b) written put options.
c) convertible preferred shares.
d) convertible bonds.
Answer: b
Difficulty: Medium
structure.
22. Which of the following statements is correct?
a) Options that are in the money are ignored in earnings per share calculations.
b) Options that are out of the money are ignored in earnings per share calculations.
c) Contingently issuable shares are never included in diluted earnings per share calculations.
d) The treasury stock method is used for written put options.
Answer: b
Difficulty: Medium
structure.
23. The if-converted method of calculating earnings per share data assumes conversion of
convertible securities as of 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).
Answer: a
Difficulty: Medium
structure.
Bloomcode: Application
24. Standard setters are very specific regarding the calculation of EPS for all of the following
reasons EXCEPT
a) predictor of future company value.
b) it can be used to assess management stewardship.
c) the income tax consequences of increased share value.
d) because of the dilutive nature of complex financial instruments.
Answer: c
Difficulty: Medium
Learning Objective: Understand how analysis helps users of financial statements assess
performance.
Section Reference: Analysis
25. All of the following regarding company valuation are true EXCEPT for
a) EPS is the preferred method recommended by standard setters.
b) sustainable cash flow or earnings can be used.

c) EPS can be used because it is considered reliable and all inclusive.
d) using EPS provides a very rough calculation only.
Answer: a
Difficulty: Medium
performance.
26. The main difference between IFRS and ASPE as it relates to EPS calculations is
a) there is no difference.
b) diluted EPS applies only to IFRS, both use basic EPS.
c) only companies with complex financial structures must calculate EPS under IFRS.
d) there are no prescribed standards under ASPE.
Answer: d
Difficulty: Medium
Learning Objective: Identify the major differences in accounting between ASPE and IFRS, and
what changes are expected in the near future.
Section Reference: A Comparison of IFRS and ASPE and Looking Ahead
27. Major challenges for standard setters calculating EPS includes all of the following, EXCEPT
a) complex financial instruments.
b) redeveloping standards under ASPE.
c) treatment of conversion features.
d) dilutive securities.
Answer: b
Difficulty: Medium
MULTIPLE CHOICE—Computational
28. At January 1, 2017, Ariel Corp. had 300,000 common shares outstanding (no preferred
shares issued). On July 1, 2017, the corporation issued 450,000 shares, and reported net
income of $630,000 for calendar 2017. Basic earnings per share for 2017 would be
a) $2.10.
b) $1.40.
c) $1.20.
d) $0.84.
Answer: c
Difficulty: Easy
Feedback: $630,000 ÷ 300,000 + (450,000 x 6 ÷ 12) = $1.20
29. At December 31, 2017, Barium Corp. had 500,000 common shares outstanding, 400,000 of
which were issued and outstanding throughout the year and 100,000 of which were issued on
October 1, 2017. Net income for calendar 2017, was $255,000. There are no preferred shares
issued. Basic earnings per share for 2017 would be
a) $0.51.
b) $0.57.
c) $0.60.
d) $0.64.
Answer: c
Difficulty: Easy
Feedback: $255,000 ÷ 400,000 + (100,000 x 3 ÷ 12) = $0.60
30. At January 1, 2017, Calypso Ltd had 600,000 common shares outstanding (no preferred
shares issued). During 2017, Calypso issued 84,000 shares on May 1, purchased 42,000
treasury shares on September 1, and issued 36,000 more shares on November 1. The weighted
average of common shares outstanding for 2017 is
a) 634,000.
b) 648,000.
c) 662,000.
d) 676,000.
Answer: b
Difficulty: Medium
Feedback: 600,000 + (84,000 × 8 ÷ 12) – (42,000 × 4 ÷ 12) + (36,000 × 2 ÷ 12) = 648,000
31. During 2017, Malamute Ltd. had 200,000 common shares, 30,000 non-cumulative
convertible preferred shares, and $1,500,000 10% convertible bonds outstanding. The preferred
shares are convertible into 40,000 common shares. During 2017, Malamute paid dividends of
$1.20 per share to the common shares and $2.00 per share to the preferred shares. Each
$1,000 bond is convertible into 45 common shares. The net income for 2017 was $900,000 and
the income tax rate was 30%. Basic earnings per share for 2017 is
a) $3.75.
b) $4.20.
c) $4.35.
d) $4.50.
Answer: b
Difficulty: Easy
Feedback: $900,000 – (30,000 x $2) ÷ 200,000 = $4.20
32. At December 31, 2016, Riel Corp. had 300,000 common shares outstanding. No additional
common shares were issued during 2017. On January 1, 2017, Riel issued 400,000 non-
cumulative, non-convertible preferred shares. During 2017, Riel paid cash dividends of
$180,000 to the common shares and $150,000 to the preferred shares. Net income for calendar
2017, was $480,000. Their income tax rate is 40%. Basic earnings per share for 2014 is
a) $0.46.
b) $1.00.
c) $1.10.
d) $1.60.
Answer: c
Difficulty: Easy
Feedback: $480,000 – $150,000 ÷ 300,000 = $1.10
33. At December 31, 2016, Tantalum Corp. had 300,000 common shares outstanding. No
common shares were issued during 2017; however, on January 1, 2017, Terrier issued 200,000
non-cumulative, non-convertible preferred shares. During 2017, Terrier paid cash dividends of
$100,000 to the common shareholders and $80,000 to the preferred shareholders. Net income
for calendar 2017 was $300,000. Basic earnings per share for 2017 would be
a) $0.67.
b) $0.73.
c) $1.00.
d) $1.67.
Answer: b
Difficulty: Easy
Feedback: $300,000 – $80,000/ 300,000 = $0.73
34. At December 31, 2016 and 2017, Danish Corp. had 100,000 common shares and 10,000,
$5, no par value cumulative preferred shares outstanding. No dividends were declared in 2016
or 2017. Net income for 2017 was $400,000. For 2017, basic earnings per share would be
a) $4.00.
b) $3.50.
c) $3.00.
d) $2.00.
Answer: b
Difficulty: Easy
$400,000  (10,000  $5.00)
Feedback: = $3.50
100,000
35. At December 31, 2016, Marion Inc. had 6,000,000 common shares outstanding. An
additional 1,000,000 common shares were issued on April 1, 2017, and 500,000 more on July 1,
2017. On October 1, 2017, Marion issued 25,000, $1,000 par value, 8% convertible bonds.
Each bond is convertible into 20 common shares. No bonds were converted in 2017. What is
the number of shares to be used in calculating 2017 basic earnings per share and diluted
earnings per share, respectively?
a) 7,000,000 and 7,000,000
b) 7,000,000 and 7,125,000
c) 7,000,000 and 7,500,000
d) 7,500,000 and 8,500,000
Answer: b
Difficulty: Medium
structure.
Feedback: 6,000,000 + (1,000,000 × 9/12) + (500,000 × 6 ÷ 12) = 7,000,000
7,000,000 + (25,000 × 20 × 3 ÷ 12) = 7,125,000
36. At December 31, 2016, Parrot Corp. had 1,000,000 common shares outstanding (no
preferred shares issued). An additional 100,000 shares were issued on April 1, 2017, and
240,000 more on September 1. On October 1, Parrot issued $3,000,000 (par value) 9%
convertible bonds. Each $1,000 bond is convertible into 40 common shares. No bonds have
been converted yet. The number of shares to be used in calculating basic earnings per share
and diluted earnings per share for 2017 is
a) 1,155,000 and 1,155,000.
b) 1,155,000 and 1,185,000.
c) 1,155,000 and 1,275,000.
d) 1,540,000 and 1,660,000.
Answer: b
Difficulty: Medium
structure.
Feedback: 1,000,000 + (100,000 × 9 ÷ 12) + (240,000 × 4 ÷ 12) = 1,155,000
1,155,000 + $3,000,000  $1,000  40  3 ÷ 12 = 1,185,000
37. At December 31, 2016, St. John’s Limited had 4,000,000 common shares outstanding (no
preferred shares issued). An additional 250,000 common shares were issued on July 1, 2017,
and 500,000 more on October 1, 2017. As well, on April 1, 2017, St. John’s issued 10,000,
$1,000 face value, 8% convertible bonds. Each bond is convertible into 40 common shares. No
bonds were converted in 2017. What is the number of shares to be used in calculating basic
earnings per share and diluted earnings per share, respectively, for 2017?
a) 4,250,000 and 4,550,000
b) 4,250,000 and 4,250,000
c) 4,250,000 and 4,650,000
d) 4,750,000 and 5,050,000
Answer: a
Difficulty: Hard
structure.
Feedback: 4,000,000 + (250,000 × 6 ÷ 12) + (500,000 × 3 ÷ 12) = 4,250,000
4,250,000 + (10,000 × 40 × 9 ÷ 12) = 4,550,000
38. Information concerning the capital structure of Shepherd Corporation follows

December 31,
2017 2016
Common shares outstanding 100,000 shares 100,000 shares
Convertible preferred shares outstanding 10,000 shares 10,000 shares
9% convertible bonds $2,000,000 $2,000,000
During 2017, Shepherd paid dividends of $1.00 per common share and $2.50 per preferred
share. The preferred shares are non-cumulative, and convertible into 20,000 common shares.
The 9% convertible bonds are convertible into 50,000 common shares. Net income for calendar
2017 was $500,000. Assume the income tax rate is 30%. Basic earnings per share for 2017 is
a) $3.33.
b) $3.65.
c) $4.75.
d) $5.00.
Answer: c
Difficulty: Medium
structure.
$500,000  (10,000  $2.50)
Feedback: = $4.75
100,000
39. On January 2, 2017, Delila Inc. issued at par $10,000 6% bonds convertible into 1,000 of
their common shares. No bonds were converted during 2017. Throughout 2017, Delila had
1,000 common shares outstanding (no preferred shares issued). Delila’s 2017 net income was
$6,000, and their income tax rate is 30%. No potentially dilutive securities other than the
convertible bonds were outstanding during 2017. Delila diluted earnings per share for 2017
would be
a) $3.00.
b) $3.21.
c) $3.30.
d) $6.42.
Answer: b
Difficulty: Medium
structure.
$6,000  ($10,000  .06  .70)
Feedback: = $3.21
1,000  1,000
40. At December 31, 2016, Felix Ltd. had 500,000 common shares outstanding (no preferred
shares issued). On October 1, 2017, an additional 100,000 common shares were issued. In
addition, Felix had $5,000,000, 6% convertible bonds outstanding at December 31, 2016, which
are convertible into 225,000 common shares; however, no bonds were converted during 2017.
Net income for calendar 2017 was $1,500,000. Assuming the income tax rate was 30%, the
diluted earnings per share for 2017 would be
a) $3.26.
b) $2.40.
c) $2.28.
d) $2.00.
Answer: c
Difficulty: Medium
structure.
$1,500,000  ($5,000,00 0  .06  .7)
Feedback: = $2.28
 3
500,000  100,000    225,000
 12 
41. On January 2, 2017, Helisinki Ltd. issued at par $300,000, 9% convertible bonds. Each
$1,000 bond is convertible into 30 shares. No bonds were converted during 2017. There were
50,000 common shares outstanding during 2017 (no preferred shares issued). Helsinki’s 2017
net income was $160,000 and their income tax rate was 30%. Helsinki’s diluted earnings per
share for 2017 would be
a) $2.71.
b) $3.03.
c) $3.20.
d) $3.58.
Answer: b
Difficulty: Medium
structure.
$160,000  ($300,000  .09  .7)
Feedback: = $3.03
50,000  $300,000  $1,000   30 
42. At December 31, 2016, Labrador Ltd. had 800,000 common shares outstanding. In addition,
the corporation had 300,000 non-cumulative preferred shares outstanding, which were
convertible into 500,000 common shares. During 2017, Labrador paid cash dividends of
$300,000 to the common shares and $200,000 to the preferred shares. Net income for 2017
was $1,200,000 and the income tax rate was 40%. Diluted earnings per share for 2017 is
a) $2.40.
b) $1.50.
c) $0.92.
d) $0.55.
Answer: c
Difficulty: Medium
structure.
Feedback: $1,200,000 ÷ (800,000 + 500,000) = $0.92
43. During 2017, Madrid Ltd. had 200,000 common shares, 30,000 non-cumulative convertible
preferred shares, and $1,500,000 10% convertible bonds outstanding. The preferred shares are
convertible into 40,000 common shares. During 2017, Madrid paid dividends of $1.20 per share
to the common shares and $2.00 per share to the preferred shares. Each $1,000 bond is
convertible into 45 common shares. The net income for 2017 was $900,000 and the income tax
rate was 30%. Diluted earnings per share for 2017 is
a) $2.98.
b) $3.38.
c) $3.27.
d) $3.41.
Answer: c
Difficulty: Medium
structure.
$900,000  ($1,500,000  .10  .7)
Feedback: = $3.27
200,000  67,500  40,000
44. On December 31, 2016, RojoLtd. had 2,000,000 common shares outstanding. On January
1, 2017, Rojo issued 500,000 non-cumulative preferred shares, which were convertible into
1,000,000 common shares. During 2017, Rojo paid cash dividends of $900,000 to the common
shares and $300,000 to the preferred shares. Net income for calendar 2017, was $6,000,000.
Assuming an income tax rate of 30%, the diluted earnings per share for 2017 is
a) $1.80.
b) $2.00.
c) $2.80.
d) $3.00.
Answer: b
Difficulty: Medium
structure.
Feedback: $6,000,000 ÷ (2,000,000 + 1,000,000) = $2.00
45. At December 31, 2016, Jack Russell Ltd. had 900,000 common shares outstanding (no
preferred shares issued). On September 1, 2017, an additional 300,000 common shares were
issued. In addition, Jack Russell had $10,000,000 (par value) 6% convertible bonds outstanding
at December 31, 2016, which are convertible into 600,000 common shares. No bonds were
converted in 2017. Net income for calendar 2017 was $3,750,000. Assuming the income tax
rate is 30%, the diluted earnings per share for 2017 is
a) $2.35.
b) $2.61.
c) $2.72.
d) $3.75.
Answer: b
Difficulty: Hard
structure.
$3,750,000  ($10,000,000  .06  .7)
Feedback: = $2.61
900,000  (300,000  ÷ 
46 (This is for sure the question we had on our final). Information concerning the capital
structure of Shelmardine Corporation follows
December 31,
2017 2016
Common shares outstanding 100,000 shares 100,000 shares
Convertible preferred shares outstanding 10,000 shares 10,000 shares
9% convertible bonds $2,000,000 $2,000,000
During 2017, Shelmardine paid dividends of $1.00 per common share and $2.50 per preferred
share. The preferred shares are non-cumulative, and convertible into 20,000 common shares.
The 9% convertible bonds are convertible into 50,000 common shares. Net income for calendar
2017 was $500,000. Assume the income tax rate is 30%.
What is the diluted earnings per share for 2017?
a) $4.00
b) $3.68
c) $3.54
d) $2.94
Answer: b
Difficulty: Hard
structure.
$500,000  ($2,000,00 0  .09  .7)
Feedback: = $3.68
100,000  50,000  20,000
47. Warrants exercisable at $20 each to obtain 50,000 common shares were outstanding during
a period when the average market price of the common shares was $25. Application of the
treasury stock method in calculating diluted earnings per share will increase the weighted
average number of outstanding shares by
a) 50,000.
b) 40,000.
c) 12,500.
d) 10,000.
Answer: d
Difficulty: Medium
structure.
Feedback: 50,000 × $20 ÷ $25 = 40,000
50,000 – 40,000 = 10,000
48. At December 31, 2017, Spearmint Inc. had 300,000 common shares outstanding (no
preferred shares issued). In addition, the corporation had granted 90,000 stock options to
certain executives, and which gave them the right to purchase Spearmint’s shares at the option
price of $37 per share. None of these options have yet been exercised. The average market
price of Spaniel's common shares during 2017 was $50. What is the number of shares that
should be used in calculating diluted earnings per share for 2017?
a) 300,000
b) 323,400
c) 331,622
d) 366,600
Answer: b
Difficulty: Medium
structure.
Feedback: 90,000 – (90,000 × $37 ÷ $50) = 23,400
300,000 + 23,400 = 323,400
49. At December 31, 2016, Skye Inc. had 500,000 common shares outstanding (no preferred
shares issued). On July 1, 2017, an additional 50,000 common shares were issued. Skye also
had unexercised call options to purchase 40,000 common shares at $15 per share outstanding
throughout 2017. The average market price of Skye's common shares was $20 during 2017.
The number of shares that should be used in calculating diluted earnings per share for 2017 is
a) 525,000.
b) 535,000.
c) 560,000.
d) 565,000.
Answer: b
Difficulty: Medium
structure.
Feedback: 500,000 + (50,000 × 6 ÷ 12) + 40,000 – (40,000 × $15 ÷ $20) = 535,000
50. Throughout 2017, Moon Ltd. had 1,200,000 common shares outstanding. As well, the
corporation paid $300,000 in preferred dividends and reported net income of $5,100,000 for
2017. In connection with the acquisition of a subsidiary company in June 2016, Moon is required
to issue 50,000 additional common shares on July 1, 2018, to the former owners of the
subsidiary. Moon’s diluted earnings per share for 2017 should be
a) $4.25.
b) $4.08.
c) $4.00.
d) $3.84.
Answer: d
Difficulty: Medium
structure.
$5,100,000  $300,000
Feedback: = $3.84
1,200,000  50,000
EXERCISES
Ex. 17-51 EPS calculations

What are the two formulas normally calculated only for common shares, and how and why are
they used?
Solution 17-51
Basic EPS – looks at the actual earnings and the actual number of common shares outstanding.
Earnings per share disclosures help investors by indicating the amount of income that is earned
by each share. It helps shareholders assess future dividend payouts and value of each share.
Diluted EPS – is a “what if” calculation that takes into account the possibility that financial
instruments such as convertible debt and options might have a negative impact on existing
shareholder returns; therefore, the shares value. It a corporation has a complex capital structure
both EPS and diluted EPS would be presented.
Difficulty: Medium
Ex. 17-52 EPS disclosures under IFRS

What EPS disclosures are required under IFRS?
Solution 17-52
IFRS requires the following
 Earnings per share amounts must be shown for all periods presented.
 If there has been a stock dividend or stock split, all per share amounts of prior period
earnings should be restated using the new number of outstanding shares.
 If diluted EPS data are reported for at least one period, they should be reported for all
periods that are presented, even if they are the same basic EPS.
 When the results of operations of a prior period have been restated the corresponding EPS
date should also be restated. The restatement’s effect should then be disclosed in the year
of the restatements.
Difficulty: Medium
Ex. 17-53 EPS presentation

When and how is EPS used and presented?
Solution 17-53
EPS is required under IFRS only and is presented on the face of the income statement. This is
due to the importance of EPS information for companies whose shares are trading on the stock
markets or that are in the process of listing on a stock market. In Canada only publicly traded
companies are required use IFRS. Privately held companies can choose to whether or not they
wish to prescribe to IFRS. ASPE does not require EPS calculations or disclosures, mainly
because these firms are closely held and due to the cost – benefit considerations. The are no
standards for calculating EPS under ASPE at all.
Difficulty: Easy
Ex. 17-54 Weighted average of common shares outstanding

At January 1, 2017, Elan Corporation had 300,000 common shares outstanding (no preferred
issued). On March 1, the corporation issued 45,000 new shares to raise additional capital. On
July 1, the corporation declared and issued a 2 for 1 stock split. On October 1, the corporation
purchased on the open market 180,000 of its own shares at $35 each and retired them.
Instructions
Calculate the weighted average number of common shares outstanding to be used in
calculating earnings per share for 2017.
Solution 17-54
Increase Shares Portion of yr Stock
(Decrease) Outstanding Outstanding Split
Jan 1 300,000 2/12 x2 100,000
Mar 1 45,000 345,000 4/12 x2 230,000
Jul 1 345,000 690,000 3/12 172,500
Oct 1 (180,000) 510,000 3/12 127,500
Weighted average of common shares 630,000
Difficulty: Medium
Ex. 17-55 Earnings per share

Define the following
a) The calculation of earnings per share
b) Complex capital structure
c) Basic earnings per share
d) Diluted earnings per share
Solution 17-55
a) Earnings per share is calculated by dividing net income less preferred dividends by the
weighted average number of common shares outstanding.
b) A complex capital structure exists when a corporation has convertible securities, options,
warrants, or other rights that upon conversion or exercise could dilute earnings per share.
c) Basic earnings per share is calculated based on the weighted average number of shares
outstanding during the period.
d) Diluted earnings per share is calculated based on the weighted average number of shares
outstanding during the period, plus all potentially dilutive common shares that were
outstanding during the period.
Difficulty: Medium
structure.
Ex. 17-56 Basic and diluted earnings per share

Throughout the calendar year 2017, Kali Corporation has 400,000 common shares outstanding
(no preferred shares issued). In addition, Collie has 5,000, 20-year, 7% bonds outstanding,
issued at par in 2015. Each $1,000 bond is convertible into 20 common shares after June 30,
2018. Collie reported net income of $600,000 for calendar 2017. Their income tax rate is 30%.
Instructions
Calculate basic and diluted earnings per share for 2017.
Solution 17-56
Net income $600,000
Basic earnings per share:  = $1.50
Outstanding shares 400,000
Incremental effect of conversion of bonds

Bond interest after taxes $245,000
 = $2.45
Assumed incremental shares 100,000
Net income  Interest after taxes
Diluted earnings per share:
Assumed outstandin g shares
$600,000  $245,000
($350,000 ×.7 = $245,000); = $1.69
400,000  100,000
Therefore the bonds are antidilutive, and basic and diluted earnings per share of $1.50 should
be reported.
Difficulty: Medium
structure.
Ex. 17-57 Basic and diluted earnings per share

Barker Inc. reported net income (30% tax rate) of $1,600,000 for calendar 2017, and an average
of 500,000 common shares outstanding during the year. Barker issued $2,000,000 par value,
10-year, 9% convertible bonds on January 1, 2015 at a $18,000 discount. The bonds are
convertible into 60,000 common shares. Barker uses the straight-line method for amortizing the
bond discount.
Instructions
Solution 17-57
Basic earnings per share
($1,600,000 ÷ 500,000 shares) = $3.20
Diluted earnings per share

$1,600,000 +.7($180,000 + $1,800)
————————————————— = $3.08
500,000 + 60,000
Difficulty: Hard
structure.
Ex. 17-58 Effect of dilutive securities on earnings per share calculations

A publicly accountable enterprise is planning on issuing the following two securities in the
coming year
1. Convertible debt where mandatory conversion will take place five years after issue.
2. Debt with detachable warrants. The warrants can be exercised if profits exceed $1,000,000
in the next five years.
Instructions
Discuss how these two securities will affect the earnings per share calculation.
Solution 17-58
1. The convertible debt is an example of an instrument that is mandatorily convertible. As a
result, it is assumed the conversion has already taken place for calculating earnings per
share. The common shares should be treated as if they were outstanding and included in
the weighted average of common shares calculation.
2. The second instrument is an example of contingently issuable shares, contingent on profits

exceeding $1,000,000 for the shares to be issued. If this condition is already met, then the
shares must be treated as if they are issued. However, if the condition has not been met,
then these shares should not be included in the EPS calculation until the condition has
been met.
Difficulty: Medium
structure.
Ex. 17-59 Diluted earnings per share

During 2017, Basenji Corp. had 300,000 common shares outstanding. In addition, at December
31, 2017, 50,000 shares were issuable upon exercise of executive stock options, which require
a $40 cash payment upon exercise (options were granted in 2015). The average market price of
the common shares during 2017 was $50.
Instructions
Calculate the number of shares to be used in determining diluted earnings per share for 2017.
Solution 17-59
Shares outstanding (given) ......................................................... 300,000
Add: Assumed issuance of stock options .................................... 50,000
350,000
Deduct: Proceeds/Average market price ($2,000,000 ÷ $50) ...... (40,000)
Number of shares to use for diluted EPS .................................... 310,000
Difficulty: Medium
structure.
Ex. 17-60 Company valuation Using EPS

When and how might EPS be used for company valuation?
Ex. 17-60
Typically a normalized or sustainable cash flow or earnings number should be used in the
valuation calculation because earnings of new income may be of higher or lower quality.
However, since this requires significant judgement when valuing common shares, the EPS
number is sometimes used instead because it is believed to be more reliable and all inclusive.
PE ratio divides the price of the share by EPS and result is called a multiplier. The multiplier
shows the per share value that each dollar of earnings generates. This is a rough calculation
only and must be used with caution.
Difficulty: Medium
performance.
Ex. 17-61 Assessing performance using EPS

How can EPS be used to assess performance and what challenges arise with this
measurement?
Ex. 17-61
EPS can be used to assess management stewardship and predict future value. Therefore IFRS
is very specific regarding its calculation. From an economic perspective it is very important to
carefully analyze the potential dilutive impact of various securities instruments. This can be quite
difficult due to the complexity of financial instruments that are very complex and difficult to break
down. IASB is continually striving to create greater transparency in EPS calculations.
Difficulty: Medium
performance.
PROBLEMS
Use the following information to answer Pr. 17-62–17-63.
Harley Corp. has been operating successfully for the past fifteen years. However, during recent
years, its common shares outstanding changed as shown below. The corporation uses the
calendar year as its fiscal year.
2017 2016 2015

Shares outstanding, Jan 1 300,000 240,000 200,000
Shares sold, Apr 2015 40,000
25% stock dividend, Jul 1, 2016 60,000
2-for-1 stock split, Jul 1, 2017 300,000
Shares sold, Oct 1, 2017 100,000
Shares outstanding, Dec 31 700,000 300,000 240,000
Net Income $ 750,000 660,000 598,000
Pr. 17-62 Weighted average calculations

Calculate the weighted average number of shares outstanding for each year.
Solution 17-62
2015: (200,000 x 3 ÷ 12) + (240,000 x 9 ÷ 12) = 230,000
2016: (300,000 x 12 ÷ 12) = 300,000

Stock dividend is weighted back to the beginning of the period.
Alternate calculation: (240,000 x 1.25 x 6 ÷ 12) + (300,000 x 6 ÷ 12)
2017: (300,000 x 2 x 6 ÷ 12) + (600,000 x 3 ÷ 12) + (700,000 x 3 ÷ 12) = 625,000
Difficulty: Hard
Pr. 17-63 Basic earnings per share

Assuming there were no preferred shares outstanding, calculate EPS for each year based on
your calculations in Pr. 17-62.
Solution 17-63
2017 2016 2015
Net income $750,000 $660,000 $598,000
Average shares outstanding (including
stock dividend and stock split) 625,000 300,000 230,000
Earnings per share $1.20 $2.20 $2.60
Difficulty: Medium
Pr. 17-64 Diluted earnings per share

On January 1, 2017, Barley Corp. had 200,000 common shares outstanding. On April 1, 2017,
20,000 common shares were issued and on September 1, 2017, Bernard bought back 30,000
treasury shares. The market price of the common shares averaged $50 during 2017. The
corporation’s income tax rate is 40%.
During 2017, there were 30,000 call options to buy common shares at $40 a share outstanding;
and there were 20,000, $7, no par value, cumulative and convertible preferred shares
outstanding. Each preferred share is convertible into three common shares.
During 2016, the corporation had issued $2,000,000 of 8% convertible bonds at face value.
Each $1,000 bond is convertible into 20 common shares.
The corporation reported $750,000 net income for calendar 2017.
Instructions
Calculate diluted earnings per share for 2017. Complete the schedule below and show all
calculations.
Net Adjust Adjusted Adjust Adjusted

Security Income -ment Net Income Shares -ment Shares EPS
Solution 17-64
Net Adjust Adjusted Adjust Adjusted
Com. Shares $750,000 $(140,000) $610,000 200,000 5,000a 205,000 $2.98
Options 610,000 205,000 6,000b 211,000 2.89
Preferred 610,000 140,000 750,000 211,000 60,000 271,000 2.77
Bonds 750,000 96,000c 846,000 271,000 40,000 311,000 2.72
a
20,000 × 3 ÷ 4 = 15,000
30,000 × 1 ÷ 3 = (10,000)
5,000 SA
b
30,000
$1,200,000 ÷ $50 = (24,000) (or) [(50 – 40) ÷ 50] × 30,000 = 6,000 SA
6,000 SA
c $96,000 $140,000
$2,000,000 ×.08 ×.6 = $96,000 = $2.40 = $2.33
40,000 60,000
Difficulty: Hard
structure.
Pr. 17-65 Basic and diluted earnings per share

Bloodhound Corp. provides the following data for calendar 2017
Net Income ....................................................................... $2,400,000
Transactions in Common Shares Change Cumulative

Jan 1 beginning 1,000,000
Mar 1 purchase of treasury shares (60,000) 940,000
Jun 1 shares split 2 for 1 940,000 1,880,000
Nov 1 issuance of new shares 120,000 2,000,000
8% Cumulative Convertible Preferred Shares (no par)

Convertible into 200,000 common shares
adjusted for split on June 1. ....................................... $1,000,000
Stock Options
Exercisable at the option price of $25 per share.
Average market price in 2014 was $30 (market price
and option price adjusted for split)................................. 60,000 shares
Instructions
a) Calculate basic earnings per share for 2017.
b) Calculate diluted earnings per share for 2017.
Solution 17-65
Calculation of weighted average shares outstanding during the year
Jan 1- Feb 29 1,000,000 x 2/12 x 2= 333 333

Mar 1- May 31 940,000 x 3/12 x 2= 470,000
Jun 1- Oct 31 1,880,000 x 5/12= 783,333
Nov 1- Dec 31 2,000,000 x 2/12= 333,333
1,920,000
Additional shares for purposes of diluted earnings per share

Potentially dilutive securities
8% convertible preferred shares.................................................... 200,000
Stock options
Proceeds from exercise of 60,000 options (60,000 × $25) ...... $1,500,000
Shares issued upon exercise of options ................................. 60,000
Less: treasury shares purchasable with proceeds
($1,500,000 ÷ $30) ................................................................. 50,000 10,000
Dilutive securities—additional shares ............................................ 210,000
$2,400,000  $80,000
a) Basic earnings per share: = $1.21
1,920,000
$2,400,000
b) Diluted earnings per share: = $1.13
1,920,000  210,000
Difficulty: Hard
structure.

Aria Ltd. provides the following information for calendar 2017
1. Net income $420,000
2. Capital Structure
a) $8 preferred shares, no par value, cumulative, $600,000
6,000 shares outstanding
No dividends were declared during 2017.
b) Common shares, 76,000 shares outstanding on January 1.
On April 1, 40,000 shares were issued for cash.
On October 1, 16,000 shares were purchased and retired. $1,000,000
c) On January 2, 2016, Aria purchased Apso Corporation.
One of the terms of the purchase was that if Aria’s net income for 2016 or subsequent
years is $400,000 or more, 50,000 additional common shares would be issued to Apso
shareholders.
Instructions
Solution 17-66
Net income........................................................................................... $420,000
*Less preferred dividends ($6,000 x $8) ............................................... (48,000)
Income available to common (numerator) ............................................ $372,000
* Since they are cumulative, PFD dividends are deducted from NI.
The fact dividends were not declared is irrelevant.
Share Changes
Jan 1 ............................................................................................. 76,000
Apr 1, issuance 40,000.................................................................. 40,000
116,000
Oct 1, retirement 16,000................................................................ (16,000)
Ending Balance .................................................................................... 100,000
Weighted average shares outstanding
Jan 1- Mar 31 76,000 x 3/12= 19,000

Apr 1- Sep 30 116,000 x 6/12= 58,000
Oct 1- Dec31 100,000 x 3/12= 25,000
102,000
Basic earnings per share: $372,000 ÷ 102,000 = $3.65
Diluted earnings per share: $372,000 ÷ (102,000 + 50,000) = $2.45
Difficulty: Hard
structure.

Chamaa Ltd. provides the following information for 2017
1. Net income $560,000
2. Capital structure
a) Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible
into 50 common shares for the next 10 years 300,000
b) Common shares, 200,000 shares issued and outstanding during the
entire year 2,000,000
c) Stock options outstanding to buy 16,000 common shares at $20 per share.
3. Other information
a) Bonds converted during 2017 None
b) Income tax rate 30%
c) Convertible debt was outstanding the entire year
d) Average market price per common share during 2017 $32
e) Stock options were outstanding the entire year
f) Stock options exercised during 2017 None
Instructions
Solution 17-67
Basic EPS = $560,000 ÷ 200,000 = $2.80
Net Adjust Adjusted Adjust Adjusted Diluted

Com. Shares $560,000 — $560,000 200,000 — 200,000 $2.80
Options 560,000 — 560,000 200,000 6,000a 206,000 2.72
Conv. Bonds 560,000 $12,600b 572,600 206,000 15,000 221,000 2.59

a
16,000
320,000
= (10,000)
32
6,000 SA
b $12,600
$300,000 ×.06 ×.7 = $12,600; = $.84
15,000
Difficulty: Medium
structure.

Arlt Inc., a publicly accountable corporation, has a July 31 year end. For the 2017 fiscal year,
there were 100,000 common shares outstanding all year. Net income for the year ended July
31, 2017 was $950,000. Their income tax rate is 30%.
Part A During the 2016 fiscal year, Arlt issued at par a 5% convertible bond, face value
$5,000,000. Each $1,000 bond is convertible into 20 common shares. No bonds were converted
in 2016, however, on March 31, 2017, 50% of the bonds were converted into common shares.
Part B On August 1, 2016, Arlt issued 100,000, $2, cumulative, convertible preferred shares.
Two preferred shares are convertible into one common share. On September 30, 2016, 20% of
these preferred shares were converted to common shares. The preferred share dividend was
declared and paid on June 15, 2017.
Instructions
Treating each part independently, calculate basic and diluted earnings per share for fiscal 2017.
Solution 17-68
Part A
Weighted average common shares and basic EPS
Date # shares Fraction of year

Aug 1, 2016 100,000 8/12 66,667
Mar 31, 2017 150,000 4/12 50,000
Total 116,667
Basic EPS = $950,000 ÷ 116,667 = $8.14
Diluted EPS Calculation

Effect of conversion rights
Interest expense for year on convertible bond—$5,000,000 x 5% $250,000

Income tax reduction due to interest—30% (75,000)
Interest expense avoided, net of tax 175,000
Number of common shares issued assuming conversion on Aug 1 100,000
Less: Portion actually converted on Mar 31 (16,667)
Incremental effect of conversion option 83,333
Per share effect = $175,000 ÷ 83,333 2.10
Therefore, potentially dilutive

Recalculate EPS
Income available to
common shareholders WACS
Basic EPS $950,000 116,667
5% convertible bond 175,000 83,333
Total 1,125,000 200,000
Therefore, diluted EPS is $1,125,000 ÷ 200,000 = $5.63
Part B Weighted average common shares and basic EPS
Date # shares Fraction of year WACS

Aug 1, 2016 100,000 2 ÷ 12 16,667
Sep 30, 2016 110,000 10 ÷ 12 91,667
Total 108,333
Basic EPS = ($950,000 – ($2 x 80,000)) ÷ 108,333 = $7.29
Diluted EPS Calculation

Effect of conversion rights
Preferred share dividend for year avoided $160,000
Number of common shares issued assuming
conversion on Aug 1 (100,000 ÷ 2) 50,000
Less: Portion actually converted on Sep 30/16 (10,000)
Incremental effect of conversion option 40,000
Per share effect = 160,000 ÷ 40,000 = 4.00
Therefore, potentially dilutive

Recalculate EPS
Income available to
common shareholders WACS
Basic EPS $790,000 108,333
Convertible preferred shares 160,000 40,000
Total 950,000 148,333
Therefore, diluted EPS is $950,000 ÷ 148,333 = $6.40
Difficulty: Hard
structure.

The following data are presented by Quentin Corp. for calendar 2017
Net income $4,500,000
Common shares outstanding, 1,000,000 shares
10%, cumulative preferred shares, convertible into 120,000 common shares $1,600,000
8% convertible bonds; convertible into 105,000 common shares $7,500,000
360,000 call options exercisable at $25 per share
Additional information
1. The common and preferred shares and the convertible bonds were outstanding from the
beginning of the year.
2. In 2017, a $500,000 dividend was declared and distributed; however, no dividends were
declared in 2016.
3. The average market price of the common shares in 2017 was $30. The stock price was $27
on January 1, 2017, and $35 on December 31, 2017.
4. The convertible bonds were sold at par.
5. The income tax rate for 2017 is 30%.
Instructions
a) Calculate basic EPS.
b) Calculate diluted EPS.
c) Briefly discuss the usefulness of the EPS measure in general. What is the additional
importance of reporting diluted EPS?
Solution 17-69
a) Basic EPS = (4,500,000 – 160,000) ÷ 1,000,000 = $4.34
b)
Denominator Numerator EPS
Start 1,000,000 $4,340,000 $4.34
Options 60,000* 0
EPS after step 1 1,060,000 4,340,000 4.09
Convertible preferred shares 120,000 160,000 1.33
EPS after step 2 1,180,000 4,500,000 3.81
Convertible bonds 105,000 420,000** 4.00
1,285,000 $4,920,000 3.83 antidilutive!
* 360,000 – (25 ÷ 30 × 360,000) = 60,000

** ($7,500,000 ×.08) × (1 –.30) = 420,000
Since the bonds are antidilutive, they are not included in the calculation, and diluted EPS =
$4,500,000 ÷ 1,180,000 = $3.81
c) EPS in general provides investors with the information on how much of the earnings each
common share earned in the current year. This informs investors how much of the firm’s
earnings they “own” and will help them in predicting future dividend payouts. Diluted EPS
provides shareholders with a more realistic picture of the future EPS as it also considers
complex financial instruments that are not common shares yet, but are likely to be converted
into common shares, which will lower the current shareholder’s share of the earnings. Diluted
EPS can also be viewed as a “worst case” scenario for the current shareholders.
Difficulty: Hard
structure.
LEGAL NOTICE
Copyright © 2016 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished
under licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning, or otherwise without the prior written permission of John Wiley &
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CHAPTER 17

EARNINGS PER SHARE

5. Understand how analysis helps users of financial statements assess performance.

MULTIPLE CHOICE—Computational (Cont’d)

3. Diluted EPS is only required when

4. Standard setters require the EPS calculation be included

9. Under IFRS, common shares are also called

10. Which of the following statements is INCORRECT?

14. Dilutive convertible securities must be used in the calculation of

assumed reacquired as the potential dilution of earnings per share.

19. Antidilutive securities

21. The reverse treasury stock method is used for

22. Which of the following statements is correct?

b) sustainable cash flow or earnings can be used.

38. Information concerning the capital structure of Shepherd Corporation follows

Ex. 17-51 EPS calculations

Ex. 17-52 EPS disclosures under IFRS

Ex. 17-53 EPS presentation

Ex. 17-54 Weighted average of common shares outstanding

Ex. 17-55 Earnings per share

d) Diluted earnings per share

Ex. 17-56 Basic and diluted earnings per share

Incremental effect of conversion of bonds

Ex. 17-57 Basic and diluted earnings per share

Diluted earnings per share

Ex. 17-58 Effect of dilutive securities on earnings per share calculations

2. The second instrument is an example of contingently issuable shares, contingent on profits

Ex. 17-59 Diluted earnings per share

Ex. 17-60 Company valuation Using EPS

Ex. 17-61 Assessing performance using EPS

Use the following information to answer Pr. 17-62–17-63.

2017 2016 2015

Pr. 17-62 Weighted average calculations

2016: (300,000 x 12 ÷ 12) = 300,000

2017: (300,000 x 2 x 6 ÷ 12) + (600,000 x 3 ÷ 12) + (700,000 x 3 ÷ 12) = 625,000

Pr. 17-63 Basic earnings per share

Pr. 17-64 Diluted earnings per share

The corporation reported $750,000 net income for calendar 2017.

Net Adjust Adjusted Adjust Adjusted

Pr. 17-65 Basic and diluted earnings per share

Transactions in Common Shares Change Cumulative

8% Cumulative Convertible Preferred Shares (no par)

Jan 1- Feb 29 1,000,000 x 2/12 x 2= 333 333

Additional shares for purposes of diluted earnings per share

Pr. 17-66 Basic and diluted earnings per share

Weighted average shares outstanding

Jan 1- Mar 31 76,000 x 3/12= 19,000

Basic earnings per share: $372,000 ÷ 102,000 = $3.65

Diluted earnings per share: $372,000 ÷ (102,000 + 50,000) = $2.45

Pr. 17-67 Basic and diluted earnings per share

Net Adjust Adjusted Adjust Adjusted Diluted

Conv. Bonds 560,000 $12,600b 572,600 206,000 15,000 221,000 2.59

Pr. 17-68 Basic and diluted earnings per share

Date # shares Fraction of year

Basic EPS = $950,000 ÷ 116,667 = $8.14

Diluted EPS Calculation

Interest expense for year on convertible bond—$5,000,000 x 5% $250,000

Therefore, potentially dilutive

Part B Weighted average common shares and basic EPS

Date # shares Fraction of year WACS

Basic EPS = ($950,000 – ($2 x 80,000)) ÷ 108,333 = $7.29

Diluted EPS Calculation

Therefore, potentially dilutive