61415

CORPORATIONS
DIVIDENDS PER SHARE

BOOK VALUE PER SHARE
Two Basic Types of Shares
• Ordinary Share
• Preference Share
Ordinary Shares
• the entity’s residual equity
• represents the basic ownership class of the corporation
• When only one class of share is issued, it must be ordinary
share.
• BASIC RIGHTS
1. Share in earnings
2. Voting Rights
3. Right of preemption or share rights
4. Share in the net assets upon liquidation
Preference Shares
• gives its owners certain advantages over ordinary
shareholders
• Preferred as to
• DIVIDENDS – to receive dividends when declared before
the ordinary shareholders
• ASSETS - priority claims on assets in the event of
corporate liquidation.
DIVIDENDS ON
PREFERENCE AND ORDINARY SHARES
• A corporation may issue both preference and ordinary shares.
Preference shares enjoy preference as to dividends.
• When the board of directors declared cash dividends, preference
shareholders are entitled to dividends before ordinary shareholders
receive any distribution.
• The dividend is stated as a percentage of the par value preference
shares.
• The corporation is not obliged to declare dividends annually.
• When the board does not declare dividends, the dividends for
cumulative preference shares accumulate, these are called dividends
in arrears.
Preference Shares
1. Non-cumulative and non-participating
2. Non-cumulative and participating
3. Cumulative and non-participating
4. Cumulative and participating
• Non-Cumulative Preference Shares.
• entitled only to the payment of current dividends,
• If there is no dividend declaration for a certain year, then the
dividend for that year is forfeited.
• Cumulative Preference Shares.

• One which any undeclared dividends accumulate each year until
paid
• Entitled to all dividends in arrears
• Non-Participating Preference Shares.
• Entitled to receive only the dividend equal to the fixed rate.
• Participating Preference Shares.

• entitle to receive dividends in excess of the basic or fixed rate
• May be fully participating with ordinary share on a prorate basis
or to a certain amount or percentage
• Before the preference share can participate, the ordinary share
should receive first an amount equal to the basic preference rate.
(PREFERENCE RATE * PAR VALUE of Ordinary Shares)
SPECIAL NOTES
• In the absence of specific designation, preference share is assumed to
be noncumulative and nonparticipating.
• Dividends in arrears usually include current dividends.
• Dividends in arrears in prior years shall be specifically disclosed,
otherwise, there are no arrearages.
• In case where there are two classes of preference share with different
dividend rates and both are participating, the lower rate shall be the
basis for allocation to the ordinary share.
• Illustration. OSCORP has the following selected accounts in its
shareholders’ equity:
12% Preference Shares, P100 par, authorized
4,000 shares, 2,000 shares issued and P200,000
outstanding
Ordinary shares, P100 par, authorized 6,000
shares, 3,000 shares issued and outstanding 300,000
Retained Earnings 260,000
• The board failed to declare dividends for the past two years.
• The current year’s result of operation gave the board reason to
declare cash dividends of P200,000.
How much is the cumulative dividend of the
CUMULATIVE PREFERENCE SHARES?
Case 1. Non-cumulative and non-Participating
Preference Shares
2,000 sh @ P100 3,000 sh @ P100
PREFERENCE ORDINARY TOTAL
OUTSTANDING SHARE CAPITAL 200,000 300,000 500,000
Current Preference Dividends
200,000 * 12% 24,000 24,000
Remainder to Ordinary
200,000 – 24,000 176,000 176,000
TOTAL 24,000 176,000 200,000

DIVIDEND PER SHARE P 12.00 P 58.67
Case 2. Non-cumulative and Participating
Preference Shares
2,000 sh @ P100 3,000 sh @ P100
Current Preference Dividends 24,000 24,000
Current Ordinary Dividends
300,000 * 12% 36,000 36,000
Remainder for Participation 140,000
Preference 2/5 * 140,000 56,000
Ordinary 3/5 * 140,000 84,000
TOTAL 80,000 120,000 200,000
Case 3. Cumulative and Non-Participating
Preference Shares
2,000 sh @ P100 3,000 sh @ P100
Preference Dividends in Arrears
24,000 * 2 years 48,000 48,000
Remainder to Ordinary
200,000 – 48,000 – 24,000 128,000 128,000
TOTAL 72,000 128,000 200,000

Case 4. Cumulative and Participating
Preference Shares
2,000 sh @ P100 3,000 sh @ P100
Preference Dividends in Arrears 48,000 48,000
Current Ordinary Dividends 36,000 36,000
Remainder for Participation 92,000
Preference 2/5 * 92,000 36,800
Ordinary 3/5 * 92,000 55,200
TOTAL 108,800 91,200 200,000
ACTIVITY (COLUMNAR)
5% Preference Shares, P50 par, authorized 100,000 shares,
60,000 shares issued and outstanding
Ordinary shares, P30 par, authorized 500,000 shares,
300,000 shares issued and outstanding
• REQUIRED: For each of the following independent cases, compute the dividend
per share of both Preference and Ordinary Shares.
• The preference share is non-cumulative & non-participating, cash dividend
declared for the year was P 900,000 with two years dividends in arrears.
• The preference share is cumulative & non-participating, cash dividend declared
for the year was P 900,000 with two years dividends in arrears.
• The preference share is non-cumulative & participating, cash dividend declared
for the year was P 1,800,000 with three years dividends in arrears.
• The preference share is cumulative & participating, cash dividend declared for
the year was P 1,500,000 with three years dividends in arrears.
• Illustration - Maximum Dividend Dividend RATE for
• TRIX CORP Shareholders’ Equity on December 31, 2019 ordinary shares
Preference Shares, P100 par, 50,000 shares 5,000,000 1,500,000
20%
Ordinary Shares, P50 par, 150,000 shares 7,500,000 7,500,000
Retained Earnings 4,000,000
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
COMPUTATION
• The preference dividend rate Ordinary Dividend ( 150,000 shares * P10) 1,500,000
is 12% and the preference Preference Dividend
2018 ( 12% * 5,000,000 ) 600,000
share is cumulative and
2019 ( 20% * 5,000,000 ) 1,000,000 1,600,000
participating.
• Dividends on the preference MAXIMUM DIVIDEND 3,100,000
share are in arrears for 2018
and 2019. Dec 31 Retained Earnings 3,100,000
• On December 31, 2019, the Cash Dividend Payable - OS 1,500,000
BODs of the entity would like Cash Dividend Payable - PS 1,600,000
to pay the ordinary To record declaration of dividend
shareholders P10 per share.
• the amount that would be paid on each share if the corporation is
liquidated
• The amount available to shareholders is exactly the amount reported
as shareholders’ equity.
• only one class of share capital
BOOK VALUE Total Shareholders' Equity

PER SHARE = # of Shares Outstanding
Illustration. The shareholders’ equity in the statement of financial
position at year-end showed the following:
SHARE CAPITAL, P100 par, 40,000 shares P4,000,000
SHARE PREMIUM 1,240,000
RETAINED EARNINGS 2,080,000
REVALUATION SURPLUS 1,400,000
TOTAL SHAREHOLDERS’ EQUITY P8,720,000
BOOK VALUE PER Total Shareholders' Equity

SHARE = # of Shares Outstanding
= P 8,720,000 / 40,000 shares

BV/Share = P 218
• 2 CLASSES of SHARE CAPITAL
BOOK VALUE PER PREFERENCE Shareholders' Equity
PREFERENCE SHARE = # of Preference Shares Outstanding
BOOK VALUE PER ORDINARY Shareholders' Equity

ORDINARY SHARE = # of Ordinary Shares Outstanding
• SHAREHOLDERS’ EQUITY is apportioned between the preference

share and ordinary share (RESIDUAL EQUITY)
ORDINARY SHE = TOTAL SHE LESS PREFERENCE SHE
ACCOUNTING PROCEDURES (apportionment)
1. An amount equal to the par or stated value is allocated to the
preference share and ordinary share.
2. Any balance of the shareholders’ equity in excess of the par or
stated value is then apportioned taking into account the liquidation
value and dividend rights of the preference shareholders.
• For BOOK VALUE purposes, the following are assumed available for
dividends:
1. Retained Earnings
2. Share Premium
3. Revaluation Surplus
ACCOUNTING PROCEDURES (apportionment)
• Where there are treasury shares and subscribed share capital
SHARES AMOUNT
Share Capital Issued XXX XXX
Add: Share Capital Subscribed xxx xxx
Total XXX XXX
Less: Treasury Shares @ Par xxx xxx
Amount and Shares Outstanding XXX XXX
• For purposes of book value computation, treasury shares shall be treated
as retired.
• The gain on retirement is credited to share premium and any loss on
retirement is charged first to share premium and then to retained earnings.
• If there is a subscription receivable, it should not be deducted to the
subscribed share capital.
Liquidation Value of Preference Share
• The amount which the preference shareholders normally receive
upon the liquidation of the corporation.
• NO LIQUIDATION VALUE; amount equal to the par value
• If there is a deficit the preference shareholders would share on a pro
rata basis with the ordinary shareholders
• The preference share may have a call price but is ignored in the book
value computation.
• CALL PRICE – amount paid to preference shareholders upon
redemption of preference shares during the lifetime of the
corporation.
• Illustration. MACM Corp. a firm doing creative tri-media products
exposure in Metro Manila and Calabarzon. The shareholders’ equity
section of the statement of financial position is as follows:
6% Cumulative and Participating Preferences Shares
P1,000 par, 5,000 shares authorized, 400 shares
issued and outstanding P400,000
Ordinary Shares, P100 par, 2,000 shares authorized,
5,500 shares issued and outstanding 550,000
Share Premium – Preference 40,000
Share Premium – Ordinary 1,610,000 720,000
Retained Earnings 850,000
Total Shareholders’ Equity P2,560,000
• The preference shares has a liquidation value of P1,300 and dividends are in
arrears for three years.
???
Cumulative and Participating Preference
Shares
Excess 400 sh @ P1,000 5,500 sh @ P100
Over Par PREFERENCE ORDINARY
FINANCIAL POSITION BALANCE 1,610,000 400,000 550,000
300 Liquidation Premium (120,000) 120,000
6% - 3 Pref. Dividends in Arrears ( 72,000) 72,000
6% Ordinary Dividends ( 33,000) 33,000
Balance for Participation 1,385,000
Preference 40/95 ( 583,158) 583,158
Ordinary 55/95 ( 801,842) 801,842
Total 0 1,175,158 1,384,842
Book Value per share P 2,937.90 P 251.79
Noncumulative and Nonparticipating
Preference Shares
Excess 400 sh @ P1,000 5,500 sh @ P100
6% - 1 Current Year Dividends ( 24,000) 24,000
Balance to Ordinary 1,466,000 1,466,000
Total 0 544,000 2,016,000

Cumulative and Participating up to 20%
Preference Shares
Excess 400 sh @ P1,000 5,500 sh @ P100
6% - 3 Pref. Dividends in Arrears ( 72,000) 72,000
6% Ordinary Dividends ( 33,000) 33,000
Preference 14% * P400,000 ( 56,000) 56,000
Ordinary (Balance) (1,329,000) 1,329,000
Total 0 648,000 1,912,000
COMPREHENSIVE The shareholders' equity on December 31, 2019 revealed the following:
ILLUSTRATION Preference share capital, 12% cumulative, participating
P100 par, 50,000 shares authorized, 25,000 shares
issued, of which 5,000 shares are in treasury 2,500,000
Treasury preference shares, at cost 400,000
Subscribed preference share capital, 10,000 shares 1,000,000
Subscription Receivable - preference 300,000
Ordinary share capital, P50 par 20,000 shares authorized
90,000 shares issued, which 10,000 shares in treasury 4,500,000
Treasury ordinary shares, at cost 550,000
Subscribed ordinary share capital, 20,000 shares 1,000,000
Subscription Receivable - ordinary 200,000
Share Premium 1,250,000
Retained Earnings unappropriated 1,000,000
Retained Earnings appropriated 2,500,000
Last dividend payment December 31, 2014
COMPUTATION of PREFERENCE P100 ORDINARY P50
SHARE CAPITAL OUTSTANDING SHARES AMOUNT SHARES AMOUNT
Share Capital Issued 25,000 2,500,000 90,000 4,500,000
Add: Share Capital Subscribed 10,000 1,000,000 20,000 1,000,000
Total 35,000 3,500,000 110,000 5,500,000
Less: Treasury Shares @ Par 5,000 500,000 10,000 500,000

Amount and Shares Outstanding 30,000 3,000,000 100,000 5,000,000
NOTE: The subscription receivable should not be deducted from subscribed

share capital.
COMPUTATIONS DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
NOTE: The treasury shares for ADJUSTMENTS
Preference Share Capital 5,000 * 100 500,000
book value purposes are treated Share Premium 100,000
as retired. Treasury Preference Shares 400,000
Share Premium per book 1,250,000

Credit Adjustment 100,000 Ordinary Share Capital 10,000 * 50 500,000
Debit Adjustment ( 50,000) Share Premium 50,000
Adjusted Share Premium 1,300,000 Treasury Ordinary Shares 550,000
Retained Earnings - UNapp 1,000,000
Retained Earnings - App 2,500,000
Total Excess over Par 4,800,000
Cumulative and Participating
Excess 30,000 sh @ P100 100,000 sh @ P50
FINANCIAL POSITION BALANCE 4,800,000 3,000,000 5,000,000
12% - 5 Pref. Dividends in Arrears (1,800,000) 1,800,000
12% Ordinary Dividends (600,000) 600,000

Preference 3/8 ( 900,000) 900,000
Ordinary 5/8 (1,500,000) 1,500,000
Total 0 5,700,000 7,100,000
Book Value per share P 190.00 P 71.00
Basic Earnings Per Share
Earnings per Share
• The amount attributable to every ordinary share outstanding
during the period.
• Pertains only to ordinary share
• Not necessary for preference share because there is a
definite rate of return for such share
PAS 33 Earnings per Share
• 2 Computations of Earning per Share
1. Basic Earning per Share
2. Diluted Earning per Share
• The presentations of earning per share is required for:
1. Entities whose ordinary shares are publicly traded.
2. Entities that are in the process of issuing ordinary shares or
potential ordinary shares in the public securities market.
• Public entities are required to present EPS while non-public
entities are not required but encouraged to present EPS.
Use of Earning per Share
a. It is a determinant of the market price of ordinary share,
thus indicating the attractiveness of the ordinary share as
an investment.
b. It is a measure of performance of management in
conducting operations.
c. It is the basis of dividend policy of an entity.
Presentation
• An entity shall present on the face of the income statement basic and
diluted earnings per share for income or loss from continuing
operations.
• An entity that reports a discontinued operations shall disclose the
basic and diluted amounts per share for the discontinued operations
either on the face of the income statement or in the notes to the
statements.
• An entity shall present basic and diluted earnings per share even if
the amounts are negative. (basic loss per share)
• When an entity presents both consolidated financial statements and
separate financial statements, the disclosures required by the
standard need be presented only on the basis of the consolidated
information.
Basic Earnings BASIC Net Income
per Share (BEPS) EPS = # of Ordinary Shares Outstanding
• NET INCOME – amount after deducting preference dividends on preference
share.
• If the preference share is cumulative, the preference dividend for the current
year only is deducted from the net income, whether such dividend is declared
or not.
• If the preference share is noncumulative, the preference dividend for the
current year is deducted from the net income only if there is a declaration.
• If there is a significant change in the ordinary share capital during the year,
the weighted average number of ordinary shares outstanding during the
period should be used as denominator.
ILLUSTRATION DATE ACCOUNTBASIC
TITLE EARNING PER SHARE
& EXPLANATION DEBIT CREDIT
An entity provided the following information for
Income from Continuing Operations 1,500,000
the current year:
Less: Preference Dividend 1M * 10% 100,000
Preference Share Capital, 1,000,000 Income to Ordinary Share 1,400,000
P100 Par, 10% cumulative
Ordinary Share Capital 5,000,000
P100 Par, 50,000 shares
Income from Continuing Operations
1,400,000 / 50,000 shares 28.00
Income from continuing operations 1,500,000 Income from Discontinued Operations
Income from discontinued operations 500,000 500,000 / 50,000 shares 10.00
Net Income 2,000,000 BASIC EARNING PER SHARE 38.00
28 10 & 13
DETERMINATION OF WEIGHTED AVERAGE
• Shares are usually included in the weighted number of shares from the date
the consideration is receivable, which is usually the date of their issue.
a. Ordinary shares in exchange for cash are included when cash is receivable.
b. Ordinary shares issued as a result of conversion of a debt instrument to
ordinary shares are included from the date the interest ceases to accrue.
c. Ordinary shares issued in place of interest or principal on other financial
instruments are included from the date the interest ceases to accrue.
d. Ordinary Shares issued in exchange for the settlement of a liability of the
entity are included from the settlement date.
e. Ordinary shares issued as consideration for the acquisition of an asset other
than cash are included as of the date on which the acquisition is
recognized.
DETERMINATION OF WEIGHTED AVERAGE
f. Ordinary shares issued for the rendering of services to the entity are
included as the services are rendered.
g. Ordinary shares issued as part of the purchase consideration of a business
combination that is an acquisition are included in the weighted average
number of shares from the date of acquisition.
h. Ordinary shares that will be issued upon conversion of a mandatory
convertible instrument are included in the calculation of basic earnings per
share from the date the contract is entered into.
i. Under IFRS, subscribed ordinary shares or partly paid shares are included
in EPS to the extent that they are entitled to participate in dividends.
Under Philippine jurisdiction, subscribed shares are entitled to
participate fully in dividends.
ILLUSTRATION I - Average Shares Outstanding
DATE TRANSACTION SHARES
Jan 1 Beginning balance 100,000
May 1 Additional issuance 150,000
Sep 1 Additional issuance 150,000
Total Shares Outstanding 400,000
Computation
DATE SHARES MTHS Outs. Peso Mths
Jan 1 100,000 12 1,200,000
May 1 150,000 8 1,200,000
Sep 1 150,000 4 600,000
3,000,000
Average Shares 3M / 12 250,000
Another Approach
DATE SHARES Fraction Average Shares
Jan 1 100,000 12 / 12 100,000
May 1 150,000 8 / 12 100,000
Sep 1 150,000 4 /12 50,000
250,000
• When share dividends or ILLUSTRATION II - Average Shares Outstanding
share splits create a change DATE TRANSACTION SHARES
in the capital structure, the Jan 1 Beginning balance * 120% 100,000
increase or decrease in the Mar 1 Issued for Cash * 120% 50,000
Jul 1 20% Share Dividend 30,000
number of shares shall be
Nov 1 Treasury Shares (15,000)
recognized retroactively. Total Shares Outstanding 165,000
• Share dividends or share
Computation
split shall be treated as a
change from the date the Jan 1 120,000 12 1,440,000
original shares were issued. Mar 1 60,000 10 600,000
Nov 1 (15,000) 2 (30,000)
2,010,000
Average Shares 167,500
2,010,000 / 12
ILLUSTRATION III - Average Shares Outstanding
DATE TRANSACTION
Jan 1 100,000 shares issued and outstanding
Aprr 1 Issued 50,000 new shares
Jun 1 Share Split 2 for 1 * 2
Jul 1 Purchased 20,000 treasury shares
Óct 1 20% share dividend * 120%
Dec 31 Share Split 5 for 1 * 5
Computation
Jan 1 1,200,000 12 14,400,000 100,000 * 2 * 120% * 5
Apr 1 600,000 9 5,400,000 50,000 * 2 * 120% * 5
Jul 1 (120,000) 6 720,000 20,000 * 120% * 5
???
19,080,000
Average Shares 1,590,000
19,080,000 / 12
Bonus Issue (Share Dividend)
• In a bonus issue, ordinary shares are issued to existing shareholders
for no consideration.
• The number of ordinary shares is increased without increase in
resources.
• The number of ordinary shares is adjusted for the proportionate
change in the number of ordinary shares outstanding as if the bonus
issue has occurred at the beginning of the earliest period presented.
ILLUSTRATION - Bonus Net Income - 2019 7,200,000
Net Income - 2020 6,000,000
Issue (Share Dividend) Ordinary Shares Outstanding-Jan 1, 2019 200,000
• On October 1, 2020, the entity
implemented a bonus issue of Ordinary Shares
200,000
outstanding – Jan 1, 2019
ordinary shares in the ratio of two Bonus Issue on Oct 1,
ordinary shares for each original 2020 (200,000 * 2)
400,000
ordinary share. Total Ordinary Shares 600,000
• If Comparative statement is outstanding
presented, the basic earnings per
share will be shown as follows: BASIC EARNING PER SHARE
2019 7,200,000 / 600,000 12.00
2020 6,000,000 / 600,000 10.00
Right Issue
• When rights are issued to shareholders most often the exercise price
is less than fair value of the shares.
• Such a rights issue includes a bonus element meaning shares issued
for no consideration.
• The Philippine term for a rights issue is “stock right” and the legal
term is “right of pre-emption”.
• Application Guidance 2 of PAS 33 provides that
“the number of ordinary shares to be used in calculating
earnings per share for all periods prior to the rights issue is the number
of ordinary shares outstanding prior to the rights issue multiplied by
the adjustment factor.
Right Issue
“the number of ordinary shares to be used in calculating
earnings per share for all periods prior to the rights issue is the number
of ordinary shares outstanding prior to the rights issue multiplied by
the adjustment factor.”
• The adjustment factor is the ratio of the market value of the share
right-on to the theoretical market value of the share ex-right.
• The market value of the share right-on is actually the market value of
the share immediately prior to the exercise of rights.
• The theoretical market value of the share ex-right is equal to the
total market value of shares outstanding plus the proceeds from the
exercise of rights divided by the number of shares outstanding after
the exercise of rights.
ILLUSTRATION - RIGHTS ISSUE
NET INCOME BEPS = NET INCOME / # of OS Outstanding
2019 1,375,000 ? “the number of ordinary
2020 1,762,500 ? shares to be used in
2021 2,400,000 ? calculating earnings per
Ordinary Shares Outstanding prior to rights issue 50,000 share for all periods prior
Rights Issue during 2019 - one new ordinary share to the rights issue is the
for every 5 outstanding shares or a total of 10,000 number of ordinary
Date of Exercise of Rights April 1, 2020 shares outstanding prior
to the rights issue
Market Value of share immediately prior to exercise
multiplied by the
or rights or market value of share right-on 110 adjustment factor.”
Exercise or subscription price 50
Determine the BEPS on 2019, 2020, and 2021. ADJUSTMENT FACTOR
The theoretical market value of the share ex-right is equal to MV of the Share Right ON
the total market value of shares outstanding plus the proceeds Theoretical MV of the
from the exercise of rights divided by the number of shares Share Ex-Right
outstanding after the exercise of rights.
Net Loss (5,000,000)
BASIC LOSS Ordinary Share Capital, P100 par 10,000,000
PER SHARE 100,000 shares
Preference Share Capital, P100 par 10% 2,000,000
cumulative, 20,000 shares convertible
into 40,000 ordibary shares
NET LOSS (5,000,000)
Preference Dividend 2M * 10% (200,000)
• If the preference share is
TOTAL LOSS to Ordinary Share (5,200,000)
noncumulative, the BASIC
Divide by Ord. Shares Outstanding 100,000 LOSS PER SHARE is P50.00.
BASIC LOSS PER SHARE P (52.00) (P5,000,000 / 100,000 shares)
DILUTED EARNINGS PER SHARE
Potential Ordinary Shares
• A financial instrument or other contract that may entitle the
holder to ordinary shares
• A financial instrument that represents future issuance of ordinary
shares
• 3 Major Types
• Convertible Bond Payable
• Convertible Preference Share
• Share Option and Warrant
Dilution and Anti Dilution
• Dilution arises when the inclusion of the potential ordinary shares
decreases the basic earnings per share or increases the basic loss per
share.
• Potential ordinary shares are dilutive securities.
• Antidilution arises when the inclusion of the potential ordinary
shares increases the basic earnings per share or decreases the basic
loss per share.
• Potential ordinary shares are considered antidilutive and ignored
in computing diluted earnings per share.
DILUTED EARNINGS PER SHARE (DEPS)
• The computation of the DEPS is based on the “as if” scenario
a. “As if” the convertible bond payable is converted into ordinary
share.
b. As if” the convertible preference shares is converted into ordinary
share.
c. As if” the share options and warrants are exercised.
• Assumption that additional ordinary shares are issued as a result of
conversion of convertible securities and exercise of share options
thereby increasing the number of ordinary shares and consequently
creating a dilution in the basic earnings per share.
Convertible Bond Payable
• The computation of diluted earnings per shares assumes that the
bond payable is converted into ordinary share.
• Adjustments shall be made both to net income and to the number of
ordinary shares outstanding.
• The net income is adjusted by adding back the interest expense on
the bonds payable, net of tax.
• The number of ordinary shares outstanding is increased by the
number of ordinary shares that would have been issued upon
conversion of the bond payable.
ILLUSTRATION –
Convertible Bonds Payable
DATE ACCOUNTBASIC
TITLE EARNINGS PER SHARE
Net Income 5,000,000
An entity had the following securities Divide by ordinary shares actually outstanding 100,000
outstanding at the beginning of the current year Basic Earnings Per Share 50.00
10% Convertible Bonds Payable, 4,000,000
each P1,000 bond convertible DILUTED EARNINGS PER SHARE
into 10 ordinary shares Net Income 5,000,000
Ordinary Share Capital, P100 par 10,000,000 Add: Interest Expense on bonds payable
250,000 shares authorized ( 10% * 4,000,000 ) 400,000
100,000 shares issued
Income Tax ( 30% * 400,000 ) (120,000) 280,000
Net Income 5,000,000 Adjusted Net Income 5,280,000
Divide by Total Ordinary Shares
Income Tax Rate 30%
Ordinary Shares actually outstanding 100,000
The convertible bond payable is Assumed issued Ordinary Shares
outstanding during the entire year, it is ( 4,000 * 10 ) 40,000 140,000
assumed that the conversion takes place DILUTED EARNINGS PER SHARE 37.71
at the beginning of the year.
ILLUSTRATION –
Convertible Bonds Payable
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Assume that the convertible bond
payable is issued on April 1 of the
current year. All conversion computation Add: Interest Expense on bonds payable
will be made for nine months only from ( 10% * 4,000,000 * 9/12 ) 300,000
April 1 to December 31 of the current Income Tax ( 30% * 300,000 ) ( 90,000) 210,000
year. Adjusted Net Income 5,210,000
Divide by Total Ordinary Shares
Ordinary Shares actually outstanding 100,000
Assumed issued Ordinary Shares
( 4,000 * 10 * 9/12 ) 30,000 130,000
DILUTED EARNINGS PER SHARE 40.08
ILLUSTRATION –Bonds Actually Converted
An entity had the following securities DATE ACCOUNTBASIC
outstanding at the beginning of the current year Jan 1 Outstanding 200,000
10% Convertible Bonds Payable, 4,000,000 Oct 1 Conversion ( 4,000 * 40 * 3/12 ) 40,000
each P1,000 bond convertible Average ordinary shares 240,000
into 40 ordinary shares Basic Earnings Per Share 20.83
Ordinary Share Capital, P100 par 2,000,000 ( 5,000,000 / 240,000 )
500,000 shares authorized DILUTED EARNINGS PER SHARE
200,000 shares issued Jan 1 Outstanding 200,000
Net Income 5,000,000 Oct 1 Conversion ( 4,000 * 40 ) 160,000
Total ordinary shares 360,000
Income Tax Rate 30%
All of the bonds were converted into Add: Interest on bonds net of tax (Jan1-Oct1)
ordinary shares on October 1 of the ( 10% * 4,000,000 * 9/12 * 70%) 210,000
current year. Adjusted Net Income 5,210,000
The issuance of ordinary shares on Divide by Total Ordinary Shares 360,000
October 1 is not “averaged” because the
convertible bonds are outstanding on DILUTED EARNINGS PER SHARE 14.47
January 1
Convertible Preference Share
• The computation of diluted earnings per shares assumes that the
preference share is converted into ordinary share.
• The net income is not reduced anymore by the amount of preference
dividend.
• The number of ordinary shares outstanding is increased by the
number of ordinary shares that would have been issued upon
conversion of the preference share.
ILLUSTRATION – Convertible Preference Share
DATE ACCOUNTBASIC
10% Convertible Cumulative Preference 3,000,000 Net Income 6,000,000
Preference Dividend ( 10% * 3,000,000 ) (300,000)
Share Capital, P100 par, 30,000 Adjusted Net Income 5,700,000
shares - one preference share Divide by ordinary shares actually outstanding 100,000
is convertible into 2 ordinary s. Basic Earnings Per Share 57.00
Ordinary Share Capital, P100 par 10,000,000
250,000 shares authorized 6,000,000
Net Income
100,000 shares issued Ordinary shares actually outstanding 100,000
Net Income 6,000,000 Assumed issued ordinary shares 60,000
through conversion of pref shares 160,000
The conversion is assumed to be made at ( 30,000 * 2 )
the beginning of the year because the DILUTED EARNINGS PER SHARE 37.50
convertible preference share is
outstanding during the entire year.
ILLUSTRATION – Preference Share issued during the year
DATE ACCOUNTBASIC
10% Convertible Cumulative Preference 3,000,000 Net Income 6,000,000
Preference Dividend ( 10% * 3,000,000 ) (300,000)
Share Capital, P100 par, 30,000 Adjusted Net Income 5,700,000
shares - one preference share Divide by ordinary shares actually outstanding 100,000
is convertible into 2 ordinary s. Basic Earnings Per Share 57.00
Ordinary Share Capital, P100 par 10,000,000
250,000 shares authorized 6,000,000
Net Income
100,000 shares issued Ordinary shares actually outstanding 100,000
Net Income 6,000,000 Assumed issued ordinary shares 20,000
through conversion of pref shares 120,000
If the convertible preference share is ( 30,000 * 2 * 4/12)
issued on September 1 of the current DILUTED EARNINGS PER SHARE 50.00
year, the conversion computation will
only be four months from September 1 to
December 31 of the current year.
ILLUSTRATION – Preference Share actually converted
Preference Share Capital - 10%, 50,000 5,000,000 DATE ACCOUNTBASIC
shares P100 par, cumulative and Jan 1 Outstanding 200,000
convertible into 100,000 Oct 1 Conversion ( 100,000 * 3/12 ) 25,000
Average ordinary shares 225,000
ordinary shares
Ordinary Share Capital, P100 par 10,000,000 Net Income 4,000,000
500,000 shares authorized Preference Dividend ( 10% * 5,000,000 ) (500,000)
200,000 shares issued Adjusted Net Income 3,500,000
Net Income 4,000,000 Divide by ordinary shares actually outstanding 225,000
The preference shares were all converted Basic Earnings Per Share 15.56
into ordinary shares on October 1 of the
If the preference dividend were not paid
current year. before the actual conversion
The preference dividends for the entire Net Income 4,000,000
year were paid in full before the Divide by ordinary shares actually outstanding 225,000
conversion. Basic Earnings Per Share 17.78
ILLUSTRATION – Preference Share actually converted
Preference Share Capital - 10%, 50,000 5,000,000 DILUTEDTITLE
DATE ACCOUNT EARNINGS PER SHAREDEBIT
& EXPLANATION CREDIT
shares P100 par, cumulative and Jan 1 Outstanding 200,000
convertible into 100,000 Oct 1 Conversion 100,000
Total ordinary shares 300,000
ordinary shares
Ordinary Share Capital, P100 par 10,000,000 The issuance of the ordinary shares on
500,000 shares authorized October 1 is not “averaged” anymore
200,000 shares issued because the convertible preference shares
Net Income 4,000,000 are outstanding on January 1.
The preference shares were all converted
into ordinary shares on October 1 of the Divide by Total ordinary shares 300,000
current year. Diluted Earnings Per Share 13.33
The preference dividends for the entire
year were paid in full before the Whether the preference dividends were paid or
conversion. not before the actual conversion, the diluted
earnings per share would be the same.
END…
Options and Warrants
• Share options are granted to employees enabling them to acquire ordinary
shares of the entity at a specified price during a definite period of time.
• Share warrants are granted to shareholders enabling them to acquire
ordinary shares of the entity at a specified price during a definite period of
time.
• Options and warrants have no cash yield but they derive their value from the
right to obtain ordinary shares at a specified price that is usually lower than
the prevailing market rate.
• Options and warrants are dilutive if the exercise price or option price is less
than the average market price of the ordinary share.
• For employee share options, the exercise price or option price shall include
the fair value of any services to be supplied to the entity under the option
plan.
ILLUSTRATION – Participating Preference Share
Special Ordinary Share 40,000 sh 80,000 sh
An entity had the following capital structure at @ P50 @ P100
the end of the current year: PREFERENCE ORDINARY
Ordinary Share Capital, P100 par 8,000,000 Outstanding Share Capital 2,000,000 8,000,000
80,000 shares issued & outstanding Basic Dividend
Preference Share Capital, P50 par 2,000,000 Preference 2M * 10% 200,000
40,000 shares issued & outstanding Ordinary 80,000 * P20 1,600,000
Net Income for the year 3000000 Balance for Participation
1,200,000 Preference 2/10 240,000
The preference dividend rate is Ordinary 8/10 960,000
10% and the preference share is Total Dividends 440,000 2,560,000
nonconvertible but cumulative Basic Earning Per Share 11.00 32.00
and fully participating.
The ordinary share has been paid a
dividend of P20 per share.

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CORPORATIONS

DIVIDENDS PER SHARE

• Cumulative Preference Shares.

• Participating Preference Shares.

TOTAL 24,000 176,000 200,000

TOTAL 72,000 128,000 200,000

BOOK VALUE Total Shareholders' Equity

BOOK VALUE PER Total Shareholders' Equity

= P 8,720,000 / 40,000 shares

BOOK VALUE PER ORDINARY Shareholders' Equity

• SHAREHOLDERS’ EQUITY is apportioned between the preference

Balance to Ordinary 1,466,000 1,466,000

Total 0 544,000 2,016,000

Total 35,000 3,500,000 110,000 5,500,000

Less: Treasury Shares @ Par 5,000 500,000 10,000 500,000

NOTE: The subscription receivable should not be deducted from subscribed

Share Premium per book 1,250,000

Balance for Participation 2,400,000

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