EXERCISES on EARNINGS PER SHARE

Guys since EPS in not included in the 2020 edition of Valix, I provided you sample
exercises.

TRUE OR FALSE
1.Preference dividends are subtracted from net income but not income from continuing
operations in computing earnings per share.
2.When a company has a complex capital structure, it must report both basic and diluted
earnings per share.
3.In computing diluted earnings per share, share options are considered dilutive when their
option price is greater than the market price.
4.The number of contingent shares to be included in diluted earnings per share is based on the
number of shares that would be issuable as if the end of the period were the end of the
contingency period.
5.A company should report per share amounts for income from continuing operations, but not
for discontinued operations.

Multiple Choice
1.Convertible preference shares
a. Are compound instruments with both a liability and an equity component.
b. Include an option for the holder to convert preference shares into a fixed number of
ordinary shares.
c. Use the “with-and-without” method to value the compound instrument.
d. All of the choices are correct.

Use the following information for questions 2 and 3

2.Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2011 2010
Ordinary Shares 150,000 shares 150,000 shares
Convertible preference shares 15,000 shares 15,000 shares
9% convertible bonds P2,400,000 P2,400,000
During 2011, Piper paid dividends of P1.20 per ordinary share and P3.00 per preference share.
The preference shares are convertible into 30,000 ordinary shares. The 9% convertible bonds
are convertible into 75,000 ordinary shares. The net income for the year ended December 31,
2011, was P600,000. Assume that the income tax rate was 30%.

What should be the basic earnings per share for the year ended December 31, 2011, rounded
to the nearest penny?
a. P2.66
b. P2.92
c. P3.70
d. P4.00

3.What should be the diluted earnings per share for the year ended December 31, 2011,
rounded to the nearest penny?
a. P3.20
 b. P2.95
c. P2.83
d. P2.35

4. Warrants exercisable at P20 each to obtain 30,000 ordinary shares were outstanding during
a period when the average market price of the ordinary shares was P25. Application of the
treasury share method for the assumed exercise of these warrants in computing diluted
earnings per share will increase the weighted average number of outstanding shares by
a. 30,000.
b. 24,000.
c. 6,000.
d. 7,500.

5. Terry Corporation had 300,000 ordinary shares outstanding at December 31, 2012. In
addition, it had 90,000 share options outstanding, which had been granted to certain
executives, and which gave them the right to purchase Terry's shares at an option price of
P37 per share. The average market price of Terry's ordinary shares for 2012 was P50. What
is the number of shares that should be used in computing diluted earnings per share for the
year ended December 31, 2012?
a. 300,000
b. 331,622
c. 366,600
d. 323,400

6. At December 31, 2010, Tatum Company had 2,000,000 ordinary shares outstanding. On
January 1, 2011, Tatum issued 500,000 shares of preference shares which were convertible
into 1,000,000 ordinary shares. During 2011, Tatum declared and paid P1,500,000 ordinary
cash dividends and P500,000 preference cash dividends. Net income for the year ended
December 31, 2011, was P5,000,000. Assuming an income tax rate of 30%, what should be
diluted earnings per share for the year ended December 31, 2011? (Round to the nearest
penny.)
a. P1.50
b. P1.67
c. P2.50
d. P2.08

7. At December 31, 2010, Emley Company had 1,200,000 ordinary shares outstanding. On
September 1, 2011, an additional 400,000 ordinary shares were issued. In addition, Emley
had P12,000,000 of 6% convertible bonds outstanding at December 31, 2010, which are
convertible into 800,000 ordinary shares. No bonds were converted in 2011. The net income
for the year ended December 31, 2011, was P4,500,000. Assuming the income tax rate was
30%, what should be the diluted earnings per share for the year ended December 31, 2011,
rounded to the nearest penny?
a. P2.11
b. P3.38
c. P2.35
d. P2.45

8. Paul Company has 1,800,000 ordinary shares outstanding on December 31, 2010. An
additional 150,000 ordinary shares were issued on July 1, 2011, and 300,000 more on
October 1, 2011. On April 1, 2011, Paul issued 6,000, P1,000 face value, 8% convertible
 bonds. Each bond is convertible into 40 ordinary shares. No bonds were converted in 2011.
What is the number of shares to be used in computing basic earnings per share and diluted
earnings per share, respectively, for the year ended December 31, 2011?
a. 1,950,000 and 2,130,000
b. 1,950,000 and 1,950,000
c. 1,950,000 and 2,190,000
d. 2,250,000 and 2,430,000

Answer
1. F
2. T
3. F
4. T
5. F

Multiple Choice
1. B
2. C
3. B
4. C
5. D
6. B
7. C
8. A

P600,000 – (15,000 × P3.00)

2. c ————————————— = P3.70.
150,000

P600,000 + (P2,400,000 × .09 × .7)

3. b ———————————————— = P2.95.
150,000 + 75,000 + 30,000

4. c 30,000 × P20 ÷ P25 = 24,000

30,000 – 24,000 = 6,000.

5. d 90,000 – (90,000 × P37 ÷ P50) = 23,400

300,000 + 23,400 = 323,400.

P5,000,000
6. b —————————— = P1.67.
2,000,000 + 1,000,000

P4,500,000 + (P12,000,000 × .06 × .7)

7. c —————————————————— = P2.35.
1,200,000 + (400,000  4/12) + 800,000

8. 1,800,000 + (150,000 × 6/12) + (300,000 × 3/12) = 1,950,000

1,950,000 + (6,000 × 40 × 9/12) = 2,130,000.