Problems with solutions

5 - Share based compensation (equity and cash settled)

5 - diluted earnings

Diluted Earnings Per Share

1. In 2019, the creditors and shareholders had the following claims from Hapia Company:

14% effective rate, convertible bonds payable issued at P6,000,000 face value due in 5 years
P40,000,000, P90 par 8% cumulative preference shares
P12,000,000, P80 par 10% noncumulative preference shares
P24,000,000, P50 par ordinary shares

Additional Information:
1. The company uses the calendar year as the accounting period.
2. The convertible bonds payable issued on January 1, 2019 are
convertible into 120,000 ordinary shares and has a nominal rate of 10%.
3. The convertible bonds payable is converted on July 31, 2019.
4. The company reported P12,000,000 Profit for the year ended December 31, 2019.
Income tax rate is 30%.

Requirement:
a. Compute for the basic earnings per share
b. Compute for the diluted earnings per share

Solutions:
a. 12,000,000 – 3,200,000* / 480,000 = 18.33
b. 12,000,000 – 3,200,000 + 295,898* / 480,000 + 120,000 = 15.15

One year preference dividend for cumulative preference shares 40,000,000 * 8% = 3,200,000
Interest expense net of tax, PV @14%, n=5 of P6000,000 = 5,176,060 * 14% * 7/12 * 70% = 295, 898

2. In 2019, the Advertising Computer Enterprise reported P4,500,000 profit in its income statement.
Also, the company declared property dividends worth P500,000 to ordinary shareholders. Its earnings
included P2,000,000 loss on sale of equipment. The company’s shareholders’ equity had shares in its
notes for the year ended December 31, 2019 below:

January 1 Ordinary shares outstanding 80,000

March 31 Issued shares previously reacquired in 2018 24,000
May 31 Issued a 10% share dividends
July 1 Issued shares for property consideration 25,000
August 31 Acquired treasury shares 60,000
November 1 Issued shares for inventory 14,400
December 1 Issued a 2-for-1 share split

Additional Information:
1. The company uses the calendar year as the accounting period.
2. The company has P3,000,000 12% convertible bonds payable issued on July 1, 2019
and convertible into ordinary share for every P30 bond.

Requirement:
a. Compute for basic earnings per share.
b. Compute for the diluted earnings per share.

Solutions:

a. 4,500,000/ 205,400 = 21.91

b. 4,500,000 – (3,000,000 * 12% * 6/12 * 0.7) / 205,400 + 100,000* = 14.32

*Preferred dividends are to be deducted not ordinary dividends.

*Share dividends and share splits are as of original issuance.
*P3,000,000/30 = 100,000
*For the weighted average number of ordinary shares:
1/1/2019 – 80,000 *110% * 2 = 176,000
3/31/2019 – 24,000 * 110% * 2 multiply by 9/12 = 39,600
7/1/2019 – 25,000 * 2 * 6/12 = 25,000
08/31/2019 – (60,000) * 2 * 4/12 = (40,000)
11/1/2019 – 14,400 * 2 * 2/12 = 4,800
Total 205,400
*Convertible bonds payable issued only on July 1, 2019, thus interest expense for the year is only for
6months.

3. In 2019, the creditors and shareholders had the following claims from Hapia Company:

12% effective rate, convertible bonds payable issued at P9,000,000 face value due in 3 years
P30,000,000, P60 par 6% cumulative preference shares
P15,000,000, P40 par 8% noncumulative preference shares

The company’s shareholders’ equity had shares in its notes for the year ended December 31, 2019
below:

January 1 Ordinary shares outstanding 240,000

March 31 Issued shares previously reacquired in 2018 72,000
May 31 Issued a 12% share dividends
July 1 Acquired treasury shares 250,000
August 31 Issued shares for property consideration 75,000
November 1 Issued shares for inventory 43,200
December 1 Issued a 2-for-1 share split

Additional Information:
1. The company uses the calendar year as the accounting period.
2. The convertible bonds payable issued on March 1, 2019 are
convertible into ordinary share for every P60 bond and has a nominal rate of 7%.
3. The company reported P8,000,000 Profit for the year ended December 31, 2019.
Income tax rate is 30%.
4. The company declared dividends on noncumulative preference shares amounting to 900,000

Requirement:
a. Compute for the basic earnings per share
b. Compute for the diluted earnings per share

a. 8,000,000 – 1,800,000 – 900,000 / 472,960* = 11.20

*For the weighted average number of ordinary shares:

1/1/2019 – 240,000 *112% * 2 = 537,600
3/31/2019 – 72,000 * 112% * 2 multiply by 9/12 = 120,960
07/1/2019 – (250,000) * 2 * 6/12 = (250,000)
08/31/2019 – 75,000 * 2 * 4/12 = 50,000
11/1/2019 – 43,200 * 2 * 2/12 = 14,400
Total 472,960

b. 8,000,000 – 1,800,000 – 900,000 + 498,908* / 472,960 + 150,000* = 9.30

*P9,000,000 / 60 = 150,000
*Interest expense net of tax, PV @12%, n=3 of P9,000,000 = 7,919,175 * 12% * 9/12 * 70% = 498,908