Sarini Azizan/ACW264 Assignment/ Sem I 2019/2020

ACW264 Financial Accounting & Reporting II

Earnings Per Share – Case Studies
NEARBY Corporation
Accounting, Analysis & Principles

NEARBY Corporation is a US-based multinational company that provides ridesharing services

that range from peer-to-peer ridesharing and ride service hailing. The company has operation
over 505 cities worldwide. Its platform can be accessed via website and mobile apps.

As at 31 December 2019, NEARBY reported an income from continuing operations of $5.97

million and a gain on discontinued operations, net of tax, of $0.07mill. Detail financial report
is provided in Appendix A.

The company has had 100,000 ordinary shares outstanding for the entire year. On Jan 1, 2019,
NEARBY issued 10-year, $200,0000 face value, 6% bonds at par. Each $1,000 bond is
convertible into 50 shares of NEARBY of $2, par value, ordinary shares. Interest on the bonds
is paid annually on December 31. The market rate for NEARBY’s non-convertible debt is 9%.
None of the bonds have been converted as of the end of 2020.

On Apr 1 2019, NEARBY issued $800,000, 8% convertible, cumulative preference shares. The
company has not declared or paid any dividends for the year of 2019.

Requirements:
Accounting
a. Prepare the journal entry NEARBY would have made on January 1, 2019, to record the
issuance of bonds. (Ignore all tax effects).
b. Compute basic and diluted earnings per share for NEARBY for 2020 and 2019.
c. Assume that all of the holders of NEARBY’s convertible bonds convert their bonds to
shares on January 1, 2020, when NEARBY’s shares are trading at $52 per share.
NEARBY pays $50 per bond to induce bondholders to convert. Prepare the journal
entry to record the conversion, using the book value method.

Analysis
Show how NEARBY will report income and EPS for 2020 and 2019 in the annual report.
Briefly discuss the importance of IFRS to the earnings analysts who evaluating companies
based on price-earnings ratios. Consider strengths and weaknesses of relying on only price-
earnings ratios as an analytical tool, comparisons for a company overtime, as well as
comparisons between companies at a point in time.

Principles
In order to converge US GAAP and IFRS, US standards-setters (the FASB) are considering
whether the equity element of a convertible bond should be reported as equity. Describe how
the journal entry you made in part (a) above should differ under US GAAP. In terms of the

1
 Sarini Azizan/ACW264 Assignment/ Sem I 2019/2020

accounting principles discussed in Chapter 2, what does IFRS for convertible debt accomplish
that US GAAP potentially sacrifices? What does US GAAP for convertible debt accomplish
that IFRS potentially sacrifices? Which approach do you think that MASB choose to adopt?

In completing this assignment, you may find Chapter 2, Chapter 6, 14 and 16 from Keiso,
Weygandt and Warfield (2018), Intermediate Accounting, IFRS edition, 3rd edition, Wiley &
Sons: Singapore to be useful.

For computation purposes, you may refer to the Table 6.2 (page 6-46 & 6-47) Present Value
of 1 (Present Value of Single Sum) & Table 6.4 (page 6-50 & 6-51) Present Value of An
Ordinary Annuity of 1 from the above-mentioned textbook.

This assignment must be submitted as a group work of 5 persons maximum in a group and
shall represent the required 10 percent as prescribed in the course outline. This assignment due
by 2pm Monday, 16 December 2019.

Required elements
All written work must accord with widely accepted academic conventions regarding attribution
and referencing. Plagiarism will be treated in the same manner as examination cheating.

The works are to be submitted in Word document and should be uploaded through e-learn
before the due date as detailed above. The group is also advised to email the soft copy of the
assignment to the course convenor.

Academic Integrity
It is the responsibility of each student to ensure that:
 You are familiar with USM policy for academic integrity
 Work submitted for assessment is original
 Appropriate acknowledgement and citation are given to the work of others
 You declare your understanding of, and compliance with, the principle of academic
integrity by completing the appropriate cover sheet when submitting assessment items.

Assessment Policy
Late submission of written work will cause a penalty unless you have been previously granted
an extension. Except in case of unavoidable circumstances, an extension request must be
sought at least 48 hours (2 days) before the due date. Therefore, you are advised to take account
the due dates when planning and managing your study and other commitments for the semester.

2
 Sarini Azizan/ACW264 Assignment/ Sem I 2019/2020

Appendix A

NEARBY Corporation
Statement of Income
At December 31, 2020
(in thousands)
2020 2019
Revenue $ 17,932 $ 11,270
Cost and expenses
Cost of goods sold 4,160 5,623
Operations and support 1,354 1,516
Sales and marketing expense 2,524 3,151
R&D expense 1,201 1,505
General and administrative expense 2,263 2,082
Operating expense
Depreciation and amortisation 510 426
Total cost and expenses 12,012 14,303
Loss from operations 5,920 (3,033)
Interest expense (479) (684)
Other income (expense), net (16) 5,029
Income (loss) from continuing operation before income taxes and
loss from equity method investment 5,425 1,312
Provision for (benefit from) income taxes (542) 283
Loss from equity method investment, net of tax - (42)
Net income (loss) from continuing operations 5,967 987
Income from discontinued operations, net of income taxes - 70
Net income (loss) attributable to NEARBY 5,967 1,057