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Accounting EPS Solutions

This document contains solutions to two questions regarding the calculation of basic and diluted earnings per share (EPS). For question 1, it provides the calculation of basic EPS for 2021 as $6.941 per share. It then tests for dilution from convertible preference shares and stock options, finding the stock options to be most dilutive. The calculation of diluted EPS is shown as $6.014 per share. Question 2 calculates basic EPS for 2020 as $0.530 per share. It tests convertible preference shares, stock options, and convertible bonds for dilution, finding stock options to be dilutive. The calculation of diluted EPS is shown as $0.517 per share.

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168 views2 pages

Accounting EPS Solutions

This document contains solutions to two questions regarding the calculation of basic and diluted earnings per share (EPS). For question 1, it provides the calculation of basic EPS for 2021 as $6.941 per share. It then tests for dilution from convertible preference shares and stock options, finding the stock options to be most dilutive. The calculation of diluted EPS is shown as $6.014 per share. Question 2 calculates basic EPS for 2020 as $0.530 per share. It tests convertible preference shares, stock options, and convertible bonds for dilution, finding stock options to be dilutive. The calculation of diluted EPS is shown as $0.517 per share.

Uploaded by

Esther Liu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

ACCT3103 - Intermediate Financial Accounting II

Assignment 5- Solutions

Question 1
Basic earnings per share:
Period Shares outstanding Stock split fraction of year WANOS
Jan1 to Jul 31 46,000 1.2 7/12 32,200
Aug 1 to Aug 31 51,000 1.2 1/12 5,100
Sep 1 to Oct 31 61,200 2/12 10,200
Nov1 to Dec31 58,200 2/12 9,700
WANOS 57,200

Earnings = $415,000 – Preference shares dividend (6,000 x $6 x 6/12) = $397,000


Basic EPS (2021) = $397,000 / 57,200 = $6.941

Dilution test
$6 Convertible preference shares
Increase in earnings = 6,000 x $6 x 6/12= $18,000
Increase in shares = 6,000 x 3 x 1.2 x 6/12 = 10,800
Incremental EPS = $24,000 / 10,800 = 1.667 (less than Basic EPS ==> dilutive)

Stock options: Average market price $36 > Exercise price $ 30 (dilutive)

Rank for dilution (from the most dilutive to the least dilutive)
1. Stock options
2. $6 Convertible preference shares

Diluted earnings per share:


Earnings WANOS EPS
Basic $397,000 57,200 $6.941
Stock option
Ordinary share assumed issue
= 5,000 x 1.2 6,000
Less: Ordinary share assumed
repurchase = 5,000 x 30/36 x 1.2 = (5,000)
Incremental share = 1,000 0 1,000
397,000 58,200 $6.821
$6 Convertible preference shares 18,000 10,800
415,000 69,000 $6.014

Diluted EPS (2021) should be $6.014.


Question 2
1. Basic EPS
Net income $6,500,000
Less: Dividends requirement on $1.2 cumulative preference share (1,200,000)
Net income identified with ordinary share $5,300,000

Basic EPS (2020) = $5,300,000 ÷ 10,000,000 = $0.530

2. Test for dilution


Stock options
Exercise price ($15) is less than the applicable market price ($18 average market price for second
half of the year for the unexercised options)  Dilutive.

Convertible preference shares


Contribution per share = (1,000,000  $1.2) ÷ (1,000,000  2) = $0.6.
Contribution is greater than the $0.53 basic EPS  Antidilutive.

Convertible bonds
Contribution per share = ($5,000,000  7%  .75) ÷ (5,000  100) = $262,500 ÷ 500,000 = $0.525
Contribution is less than the $0.53 basic EPS  Dilutive.

3. Diluted EPS
Earnings WANOS EPS
Basic EPS $5,300,000 10,000,000 $0.530
Stock options
No. of shares assumed issued(3m x 6/12) 1,500,000
Less: No. of shares assumed to be repurchased
($3m x $15/ $18 x 6/12) (1,250,000)
No. of new shares to be issued 250,000 250,000
$5,300,000 10,250,000 $0.517

*It is NOT necessary to continue the computation beyond the stock option, since the EPS at
this point ($0.517) is less than the incremental EPS impact of the convertible bond ($0.525).

Diluted EPS (2020) should be $0.517.

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