EARNINGS PER SHARE

 Earnings per share information is required to be presented on the face of the income
statement of entities whose ordinary shares are publicly traded and of entities that are in the
process of issuing ordinary shares or potential ordinary shares in public markets.

 Both basic earnings per share and diluted earnings per share shall be presented on the face of
the income statement with equal prominence.

 The objective of earnings per share information is to provide a measure of the interests of each
ordinary share in the performance of the entity over the reporting period.

 Enterprises presenting continuing operations and discontinued operations in their income

statement shall present earnings per share in respect of continuing operations and
discontinued operations.

 Basic earnings per share is computed by dividing profit or loss attributable to ordinary equity
holders by the weighted average number of ordinary shares outstanding during the period.

 The profit or loss attributable to ordinary equity holders shall be the profit or loss for the period
adjusted for the amount of preference dividends and differences arising on the settlement of
preference shares.

 The weighted average number of ordinary shares outstanding shall be adjusted for the effects
of share split, bonus issue and other events that have changed the number of shares
outstanding without a corresponding change in resources.

 In computing diluted earnings per share, profit is adjusted by the dividends or after tax interest
recognized in the period related to dilutive potential ordinary shares and any other changes
that would result from the conversion of the dilutive potential ordinary shares. The
denominator is adjusted by the weighted average number of ordinary shares that would be
issued on the exercise of all the dilutive potential ordinary shares or conversion of potential
ordinary shares into ordinary shares.

Basic EPS = Net Income – Share of Income for Preferred

Weighted Average # of Ordinary Shares

PROBLEMS

1. Assume the following independent cases:

Case A

The following transactions affected owners' equity for Kisses Company during 2017:

Date Share Changes No. of sh.(P10

par)
Jan. 1 Shares outstanding 44,000
Feb. 1 Issued for cash 56,000
May 1 Acquisition of treasury (25,000)
shares
Aug. 1 25% bonus issue 25% of
outstanding
shares
Sept. 1 Resold part of treasury 10,000
shares
Nov. 1 Issued 2-for-1 share split
 Case A (For both basic and diluted earnings per share)
44,000 x 12/12 x 1.25 x 2 110,000
56,000 x 11/12 x 1.25 x 2 128,333
25,000 x 8/12 x 1.25 x 2 ( 41,667)
10,000 x 4/12 x 2 6,667
Weighted average no. of shares 203,333

Case B

The following transactions affected owners' equity for Nestle Company during 2017.

Feb. 1 20,000 shares of ordinary share were sold in the

market.
Apr. 1 Purchased 5,000 shares of ordinary share to be
held as treasury. Paid cash dividends of P0.50
per share.
May 1 Split ordinary share 3-for-1.
July 1 35,000 shares of ordinary share were sold.
Oct. 1 A 5% bonus issue was issued.
Dec. 31 Paid a cash dividend of P0.75 per share. The
total amount paid for dividends on December 31
was P511,875.
Case B (For both basic and diluted earnings per share)
Work back to find beginning outstanding shares
511,875/0.75 = 682,500/1.05 = 650,000 – 35,000 = 615,000/3 = 205,000
205,000 + 5,000 – 20,000 = 190,000 shares
190,000 x 3 x 1.05 x 12/12 598,500
20,000 x 3 x 1.05 x 11/12 57,750
5,000 x 3 x 9/12 x 1.05 (11,812.50)
35,000 x 1.05 x 6/12 18,375
Weighted average no. of shares 662,812.50

Case C

Transactions involving the ordinary share account of the Ferrero Company during the two-year
period 2016 and 2017 were as follows:

2016
Jan. 1 Balance 200,000 shares of P10 par ordinary
share. Options to purchase 7,000 shares for
P20 a share are likewise outstanding.
Apr. 1 P2,500,000 of convertible bonds were converted
with 50 shares issued for each P1,000 bond.
July 1 A 10% bonus issue was declared.
Oct. 1 Option to purchase 7,000 shares for P20 a
share was exercised.
2017
Apr. 1 A 2-for-1 share split was declared.
Oct. 1 80,000 shares were sold for P30 a share.

The average market price of an ordinary share in 2017 is P25.

Required: Compute the weighted average number of shares to be used in the calculation of
basic earnings per share and diluted earnings per share for the company’s
comparative income statement for years 2016 and 2017. Assume that the
potential ordinary shares, as given, are dilutive.
Case C
 For basic EPS
2016
200,000 x 1.10 x 12/12 x 2 440,000
125,000 x 1.10 x 9/12 x2 206,250
7,000 x 3/12 x 2 __3,500
649,750
2017:
325,000 x 1.10 = 357,500+7,000=364,500 shares, beginning
364,500 x 2 x 12/12 729,000
80,000 x 3/12 20,000
749,000

For Diluted EPS

2008
For basic EPS 649,750
125,000 x 110% x 3/12 x 2 68,750
7,000 x 9./12 x 2
7000 (25-20)
25 x 9/12 x 2 x 1.1x2 2,310
720,810

2009
Beginning 364,500 x 2 x 12/12 729,000
80,000 x 3/12 20,000
749,000

2. The controller of Lili Pharmaceutical Company is currently preparing the calculation for basic
and diluted earnings per share. Below is selected financial information for the fiscal year
ended June 30, 2017.

Lili Pharmaceutical Company

Selected Statement of Financial Position Information
June 30, 2017

Long-term debt:
Notes Payable, 10% P 1,000,000
7% Convertible Bonds Payable 5,000,000
10% Bonds Payable 6,000,000
Total long-term debt P12,000,000

Shareholders’ Equity
Preference Share, 8.5% cumulative, P50 par
value, 100,000 shares authorized,
25,000 shares issued and outstanding P 1,250,000
Ordinary Share, P1 par, 10,000,000 shares
authorized, 1,000,000 shares issued and
outstanding 1,000,000
Share Premium 4,000,000
Retained Earnings 6,000,000
Total Shareholders’ Equity P12,250,000

The following transactions have also occurred at Lili.

1. Options were granted in 2015 to purchase 100,000 shares at P15 per share. Although no
options were exercised during 2017, the average price per ordinary share during fiscal year
2017 was P20 per share.
 2. Each bond was issued at face value. The 7% convertible debenture will convert into
ordinary share at 50 shares per P1,000 bond.

3. Each 8.5% preference share is convertible into 10 ordinary shares.

4. There are no preference share dividends in arrears; however, preference share dividends
were not declared in fiscal year 2017.

5. The 1,000,000 ordinary shares were outstanding for the entire 2017 fiscal year.

6. Net income for fiscal year ended June 30, 2017 was P1,500,000 and the average income
tax rate is 35%.

Required: For the fiscal year ended June 30, 2017, calculate Lili Pharmaceutical Company’s:
(a) Basic earnings per share and (b) Diluted earnings per share.

(Lili Pharmaceutical Company)

↑ in earnings
attributable to Earnings per
ordinary incremental
shareholders ↑ in number of ordinary share
shares
Options Nil 100,000 (20-15) = Nil
25,000
20
Convertible P1,250,000 x 25,000 x 10 P0.425
preference 8.5% = 250,000
shares = P106,250
7% P5,000,000 x 5,000 x 50 = P0.91
convertible 7% x 65%= 250,000
bonds P227,500

The sequence to include potential ordinary shares is as follows

(1) options
(2) convertible preference shares
(3) convertible bonds
Basic earnings per share =( P 1,500,000 – P106,250) / 1,000,000 shares = P1.39

When only options are considered, the dilutive earnings per share is
P1,500,000-P106,250 = P 1.36
1,000,000 + 25,000

When convertible preference shares are then considered, the dilutive earnings per share is
______P1,500,000____ = P1.18 thus, the convertible preference is dilutive.
1,025,000 + 250,000

When 7% convertible bonds are also considered, the dilutive earnings per share is
P1,500,000 + 227,500 = P1.13 ; thus, the convertible bonds are dilutive
1,275,000 + 250,000
The dilutive earnings per share is P1.13
3. At December 31, 2017 and 2016, Laphan Corp. had 200,000 ordinary shares and 20,000 of
5%, P100 par value cumulative preference shares outstanding. No dividends were declared
on either the preference or ordinary shares in 2017 or 2016. Net income for 2017 was
P1,000,000.
For 2017, basic earnings per ordinary share amounted to
a. P5.00 b. P4.75 c. P4.50 d. P4.00

MC11. C 1,000,000 – (20,000 x 100 x 5%) = 900,000/200,000 = 4.50

P 1,000,000 – 100,000
200,000 shares

4. The Thomas Company's net income for the year ended December 31 was P300,000. During
the year, Thomas declared and paid P30,000 in cash dividends on non-cumulative preference
shares and P52,500 in cash dividends on ordinary share. At December 31, 36,000 of
ordinary shares were outstanding, 30,000 of which had been issued and outstanding
throughout the year and 6,000 of which were issued on July 1. There were no other ordinary
share transactions during the year, and there is no potential dilution of earnings per share.
What should be the year's basic earnings per ordinary share of Thomas, rounded to the
nearest centavo?
a. P6.60 b. P7.50 c. P8.18 d. P9.09

MC12. C 300,000 – 30,000 = 270,000; 270,000/30,000+(6,000x6/12) =

8.18

P 300,000 – 30,000
(30,000 x 12/12) + (6,000 x 6/12)

P 270,000 / 33,000 = 8.18

5. Bay Area Supplies had 60,000 of ordinary shares outstanding at January 1. On May 1, Bay
Area Supplies issued 31,500 ordinary shares. Outstanding all year were 30,000 shares of
non-convertible preference shares on which a dividend of P4 per share was paid in December.
Net income for the year was P290,100.
Basic earnings per share for the year is
a. P1.86 b. P2.10 c. P2.84 d. P3.17
MC13. B 290,100 – (30,000 x 4) = 170,100/60,000+(31,500x 8/12) = 2.10
P 290,100 – (30,000 x 4)
(30,000 x 12/12 ) + 31,500

6. Glendale Enterprises had 200,000 of ordinary shares issued and outstanding at December 31,
2016. On July 1, 2017, Glendale effected a 10% bonus issue. Unexercised share options to
purchase 40,000 shares of ordinary share (adjusted for the 2017 bonus issue) at P20 per
share were outstanding at the beginning and end of 2017. The market price of Glendale's
ordinary share (which was not affected by the bonus issue) was P25 per share during 2017.
Net income for the year ended December 31, 2017, was P1,100,000.
What should be Glendale's 2017 diluted earnings per ordinary share, rounded to the nearest
centavo?
 a. P4.23 b. P4.82 c. P5.00 d. P5.05

MC14. B 1,100,000 = 1,100,000 = 4.82

(200,000 x 1.10) + 40,000 x (25-20) 228,000
25

7. At December 31, 2016, Dayplanner Inc. had 250,000 of ordinary shares outstanding. On
October 1, 2017, an additional 60,000 shares were issued for cash. Dayplanner also had
P2,000,000 of 8% convertible bonds outstanding at December 31, 2017, which are convertible
into 50,000 ordinary shares. The bonds are dilutive in the 2017 earnings per share
computation. No bonds were issued or converted into ordinary shares during 2017.
What is the number of shares that should be used in computing diluted earnings per share for
the year ended December 31, 2017?
a. 265,000 b. 300,000 c. 310,000 d. 315,000

MC15. D 250,000 + (60,000x3/12) + 50,000 = 315,000

8. At December 31, 2017 and 2016, Red Company had 100,000 ordinary shares and 10,000 of
5%, P100 par value cumulative preference shares outstanding. No dividends were declared
on either the preference or ordinary shares in 2017 or 2016. Net income for 2017 was
P1,000,000. For 2017, the basic earnings per share amounted to - a. P10.00 b. P 9.50
c. P9.00 d. P5.00
MC16. B 1,000,000 – (5% x 10,000 x 100)/100,000 = 9.50

9. Zacor Incorporated had 2,500,000 shares of ordinary shares outstanding on December 31,
2016. An additional 500,000 shares of ordinary shares were issued on April 1, 2017, and
250,000 more on July 1, 2017. On October 1, 2017, Zacor issued 5,000 P1,000 face value,
7% convertible bonds. Each bond is convertible into 40 ordinary shares. No bonds were
converted into ordinary shares in 2017.
What is the number of shares to be used in computing basic earnings per share and diluted
earnings per share, respectively?
a. 2,875,000 and 2,925,000 b. 2,875,000 and 3,075,000

c. 3,000,000 and 3,200,000 d. 3,000,000 and 3,050,000

MC17. D 2,500,000 + (500,000 x 9/12) + (250,000 x 6/12) = 3,000,000
3,000,000 + (5,000 x 40 x 3/12) = 3,050,000

10. Doll Co. had 200,000 ordinary shares, 20,000 convertible preference shares, and P1,000,000
of 10% convertible bonds outstanding during 2017. The preference shares are convertible
into 40,000 ordinary shares. During 2017, Doll paid dividends of P1.20 per share on the
ordinary shares and P3.00 per share on the preference shares. Each P1,000 bond is
convertible into 45 ordinary shares. The net income for 2017 was P600,000 and the income
tax rate was 30%.
What is the basic earnings per share for 2017?
a. P2.50 b. P2.70 c. P2.73 d. P3.00
MC18. B 600,000 – (20,000 x 3) = 540,000/200,000 = 2.70

11. What is the diluted earnings per share for 2017?

a. P2.14 b. P2.25 c. P2.35 d. P2.46
MC19. C 600,000 + (1,000,000 x 10% x 70%) = 2.35
200,000 + 40,000 + (1,000 x 45)
13. Warrants exercisable at P20 each to obtain 30,000 ordinary shares were outstanding during a
period when the average market price of the ordinary share was P25.
By how many shares will the weighted average number of outstanding shares increase in
computing the diluted EPS? a. 30,000 b. 24,000 c. 7,500 d. 6,000
MC20. D 30,000 x (25-20)/25 = 6,000

14. Angelic Company has one class of ordinary shares outstanding and no other securities are
potentially convertible into ordinary shares. Angelic Company’s 2016 audited financial
statements reported earnings per share of P4.95.
On April 1, 2017, a 10% bonus issue was declared which was issued on May 1, 2017. On
September 1, 2017, 12,000 new shares were issued for cash. Net income reported by Angela
Company for 2016 and 2017 were P495,000 and P825,000, respectively.
What amount should Angela Company report as earnings per share in its 2017 and 2016
comparative income statements?
a. 2017 – P7.24; 2016 – P4.95
b. 2017 – P7.24; 2016 – P4.50
c. 2017 – P6.76; 2016 – P4.50
d. 2017 – P6.76; 2016 – P4.95
MC21. B 495,000/4.95 = 100,000 shares; 2016: 495,000/(100,000 x
1.10) = 4.50
2017: 825,000/(110,000 + (12,000 x 4/12) = 7.24

15. Peter Corporation’s capital structure was as follows:

December 31
2016 2017
Outstanding shares:
Ordinary 110,000 110,000
Convertible preference 10,000 10,000
During 2017, Peters paid dividends of P3.00 per share on its preference shares. The
preference shares are convertible into 20,000 shares of ordinary share and are considered
potential ordinary shares. Net income for 2017 was P850,000. Income tax rate is 30%. The
diluted earnings per share for 2017 is
a. P6.31 b. P6.54 c. P7.08 d. P7.45
MC22 B 850,000/130,000 = 6.54

16. Ethan Company reported net income of P770,000 for 2017. Ethan sold 15,000 treasury
shares acquired in a previous year on July 1 and 15,000 new shares on November 1. At year
end, 180,000 shares were outstanding. Ethan had 20,000 shares of P100 par value 7%
preference shares outstanding all year. Ethan paid dividends to preference shareholders as
stipulated.
The weighted average number of ordinary shares used to compute earnings per share for
2017 is
a. 150,000 b. 160,000 c. 165,000 d. 180,000
MC23 B 150,000 + (15,000 x 6/12) + (15,000 x 2/12) = 160,000

17. Using the data of No. 16, the basic earnings per share for 2017 is
a. P3.50 b. P3.94 c.P4.81 d. P6.10
MC24 B (770,000 – 140,000) / 160,000 = 3.94

18. If the preference share given in No. 16 is convertible into two ordinary shares, the diluted
earnings per share for 2017 is a. P3.85 b. P3.94 c.P4.81 d.
P6.10
MC25 A 770,000/(160,000+40,000) = 3.85

19. The Royal Corporation reported net income for 2017 of P177,500. Royal began the year with
100,000 shares of P5 par value ordinary shares outstanding and 2,500 shares of P100 par
value 8% preference shares outstanding. On October 1, Royal sold 10,000 shares of ordinary
 shares for P6 per share. Royal paid dividends to both the ordinary and preference
shareholders in December.
What is the weighted average number of ordinary shares to be used in the computation of
basic earnings per share for 2017? a. 100,000 b. 102,500 c. 105,000 d.
110,000
MC26 B 100,000 + (10,000 x 3/12) = 102,500

20. Using the data of No. 19, how much is the basic earnings per share for 2017?
a. P1.43 b. P1.50 c. P1.54 d. P1.73
MC27 C (177,500 – 20,000) / 102,500 = 1.54

21. If each preference share given in No. 19 is convertible into 8 ordinary shares, what is the
diluted earnings per share for 2017?
a. P1.29 . b. P145 c. P1.54 d. P1.73
MC28 B 177,500 / (102,500 + 20,000) = P1.45

22. On January 1, Abe Company had 100,000 ordinary shares outstanding. During the year, the
following events occurred:
March 1 2 for 1 share split
June 1 Issued 30,000 additional shares
September 1 20% bonus issue
What was the weighted average number of shares outstanding for the year?
a. 230,000 b. 256,000 c. 261,000 d. 276,000
MC29 C (100,000 X 2 X 120%) + (30,000 X 120% X 7/12) = 261,000

23. Win Company had 100,000 ordinary shares outstanding on January 1. In addition, as of
January 1, the company had issued 10,000 convertible cumulative 5% preference shares with
P100 par. These preference shares were converted on September 1. Each preference
share was converted into six ordinary shares. The preference dividends for the entire year
were paid in full before the conversion. The company has no other potentially dilutive
securities. Net income for the year was P2,000,000.
What is the amount of basic earnings per share?
a. P16.25 b. P16.67 c. P19.50 d. P20.00
MC30 A Numerator: 2,000,000 – (1,000,000 x 7.5% x 8/12) = 1,950,000
Denominator: 100,000 + (60,000 x 4/12) = 120,000
BEPS = 1,950,000/120,000 = P16.25

Book Value Per Share

1. XYZ has a total Stocholders’ Equity of P 2,500,000 as of December 31, 2017. Compute the
book value under each of the following assumptions:
a. The company has only one class of share – 200,000 ordinary shares, par value P 10
b. The company has two classes of shares – a. 10,000 shares of preference shares with par
value of P 100 and a liquidation value of P 120. b. 100,000 shares of ordinary shares, par
value P 10 par.

1. P2,500,000 / 200,000 shares P12.50

2. Total Shareholders’ Equity P2,500,000

Equity identified with preference shares (10,000 sh x P120) 1,200,000
Equity identified with ordinary shares P1,300,000

BV/share: PS – P120.00; OS – P13.00

2. The FLAMES Corporation has the following Items in its December 31, 2017 Financial
Statements:
Ordinary Shares Capital, P 15 par, 100,000 shares P 1,500,000
10% preference Shares Capital, P 25 par, 10,000 shares 250,000
 Ordinary Share Premium 200,000
Preference Share Premium 150,000
Retained Earnings 200,000
Compute the book value per share for both types of shares under the following assumptions:
a. Preference shares have liquidation value of P 30 and no dividends in arrears.
b. Preference is cumulative with 5 years in arrears. Preferred as to assets up to par and any
dividends in arrear must be paid before ordinary shares.

1. Total Shareholders’ Equity P2,300,000

Less Equity identified with PS (10,000 sh @ P30) 300,000
Equity identified with OS P2,000,000

BV per share
PS P 30.00
OS (P2,000,000 / 100,000 sh) P 20.00

2. Total Shareholders’ Equity P2,300,000

Less Equity identified with PS
Liquidation value (10,000 sh @ P25) P250,000
Div. in arrears (P25,000 x 5 yrs.) 125,000 375,000
Equity identified with OS P1,925,000
BV per share
PS P 37.50
OS (P1,925,000,000 / 100,000 sh) P 19.25