number of ordinary shares that would have been issued

at
DILUTED EARNINGS PER SHARE
An entity shall calculate diluted earnings per share
amounts for profit or loss attributable to ordinary equity
holders of the parent entity and, if presented, profit or
loss from continuing operations attributable to those
equity holders.
For the purpose of calculating diluted earnings per share,
an entity shall adjust profit or loss attributable to
ordinary equity holders of the parent entity, and the
weighted average number of shares outstanding, for the
effects of all dilutive potential ordinary shares.
Earnings
For the purpose of calculating diluted earnings per
share, an entity shall adjust profit or loss attributable to
ordinary equity holders of the parent entity, as calculated
in accordance with paragraph 12, by the after-tax effect
of:
a. Any dividends or other items related to dilutive
potential ordinary shares deducted in arriving at
profit or loss attributable to ordinary equity holders
of the parent entity as calculated in accordance with
paragraph 12;
b. Any interest recognized in the period related to
dilutive potential ordinary shares;
c. Any other changes in income or expense that would
result from the conversion of the dilutive potential
ordinary shares.
Shares
For the purpose of calculating diluted earnings per share,
the number of ordinary shares shall be the weighted
average number of ordinary shares plus the weighted
average number of ordinary shares that would be issued
on the conversion of all the dilutive potential ordinary
shares into ordinary shares. Dilutive potential ordinary
shares shall be deemed to have been converted into
ordinary shares at the beginning of the period or, if later,
the date of the issue of the potential ordinary shares.
The average market price of ordinary shares during the
period shall be treated as an issue of ordinary shares for
no consideration.
Disclosure
An entity shall disclose the following
a. The amounts used as the numerators in calculating
basic and diluted earnings per share, and a
reconciliation of those amounts to profit or loss
attributable to the parent entity for the period. The
reconciliation shall include the individual effect of
each class of instruments that affects earnings per
share.
b. The weighted average number of ordinary shares
used as the denominator in calculating basic and
diluted earnings per share, and a reconciliation of
these denominators to each other. The reconciliation
shall include the individual effect of each class of
instruments that affects earnings per share.
c. Instruments (including contingently issuable shares)
that could potentially dilute basic earnings per share
in the future, but were not included in the calculation
of diluted earnings per share because they are
antidilutive for the periods presented.
d. A description of ordinary share transactions or
potential ordinary share transactions, other than
those accounted for in accordance with paragraph
64, that occur after the balance sheet date and that
would have changed significantly the number of
ordinary shares or potential ordinary shares
outstanding at the end of the period of those
transactions had occurred before the end of the
reporting period.

Dilutive potential Ordinary shares

Potential ordinary shares shall be treated as dilutive
when, and only when, their conversion to ordinary shares
would decrease earnings per share or increase loss per
share from continuing operations.

Options, warrants ordinary shares

For the purpose of calculating diluted earnings per share,
an entity shall assume the exercise of dilutive options and
warrants of the entity. The assumed proceeds from these
instruments shall be regarded as having been received
from the issue of ordinary shares at the average market
price of ordinary shares during the period. The difference
between the number of ordinary shares issued and the

1. The EPS computation that is forward-looking and
based on assumptions about future transactions is
a. Diluted EPS c. continuing operation EPS
b. Basic EPS d. extraordinary EPS
2. Potential ordinary shares do not include
a. Financial liabilities or equity instruments including
preference shares that are not convertible into
ordinary shares
b. Stock warrants
c. Stock options or employee plans that allow
employees to receive ordinary shares as part of
their remuneration
d. Shares which would be issued upon the
satisfaction of certain conditions resulting from
contractual arrangements such as purchase of a
business
3. At what point are dilutive potential shares deemed to
have been converted into ordinary shares?
a. At the start of the period
b. At the end of the period
c. The date of the issue of the dilutive shares.
d. At the start of the period or, if later, the date of
the issue of the potential shares.
4. In determining earnings per share, interest expense,
net of applicable income taxes, on convertible debt
which is dilutive should be
a. Ignored for diluted earnings per share
b. Added back to net income for diluted earnings per
share
c. Deducted from net income for diluted earnings
d. None of the above
5. When computing diluted EPS for a company with a
complex capital structure, what is the denominator in
the computation?
a. Number of common shares outstanding at year-
end
b. Weighted-average number of common shares
outstanding
c. Weighted-average number of common shares
outstanding plus all other potentially antidilutive
securities
d. Weighted-average number of common shares
outstanding plus all other potentially dilutive
securities
6. When computing diluted earnings per share, potential
ordinary shares are
a. Ignored
b. Recognized whether they are dilutive or
antidilutive
c. Recognized only if they are antidilutive
d. Recognized only if they are dilutive
7. Dilution is
a. An increase in earnings per share resulting from the
assumption that convertible instruments are
converted, that options or warrants are exercised, or
that ordinary shares are issued upon the satisfaction
of specified conditions.
b. An increase in loss per share resulting from the
assumption that convertible instruments are
converted, that options or warrants are exercised, or
that ordinary shares are issued upon the satisfaction
of specified conditions
c. Either a or b
d. Neither a nor b
8. Potential ordinary shares include
a. Share warrants and options
b. Debt or equity instruments, including preference
shares, that are convertible into ordinary shares
c. Shares which would be issued upon the satisfaction of
certain conditions resulting from contractual
arrangements, such as the purchase of a business or
other assets
d. All of the above
9. Which statement is incorrect regarding diluted earnings
per share computation and presentation?
a. Diluted EPS is calculated by adjusting the earnings and
number of shares for the effects of dilutive options
and other dilutive potential ordinary shares
b. The effects of anti-dilutive potential ordinary shares
are ignored in calculating diluted EPS
c. Diluted earnings per share shall be reported for all
periods presented, even if it equals basic earnings per
share
d. None of the above
10. West Co. had earnings per share of P15 for 2019 before
considering the effects of any convertible securities
occurred during 2019. However, possible conversion of
convertible bonds, not considered ordinary share
equivalents, would have reduced earnings per share by
P.075. the effect of possible exercise of share options
would have increased earnings per share by P.10.
What amount should west report as diluted earnings per
share for 2019?
a. 14.25 c. 15.00
b. 14.35 d. 15.10
 Tax rate 40%
Average market of ordinary shares P25 per share
13. Compute basic earnings per share
a. 2.00 c. 1.82
b. 1.70 d. 1.07

11. Faith Co. had 200,000 ordinary shares, 20,000 14. Compute diluted earnings per share
convertible preference shares, and P1,000,000 of 10% a. 1.70 c. 1.66
convertible bonds outstanding during 2019. The b. 1.62 d. 1.25
preference share is convertible into 40,000 ordinary
shares. During 2019, faith paid dividends of P1.2 per 15. The income statement of Pastel Company shows a net
share on ordinary shares and P4.00 per share on loss of P10,000,000 for the year ended December 31,
preference shares. Each P1,000 bond is convertible 2019. The company had shares outstanding as follows:
into 45 ordinary shares if converted before 2021 and
40 shares if converted after 2021. The profit for 2019 Ordinary share capital, P100 par
was P800,000 and the income tax rate was 30%. 400,000 shares 40,000,000
Diluted earnings per share for 2019 is Preference share capital, P100 par,
a. 2.77 c. 2.81 10% cumulative, 100,000
b. 3.05 d. 3.08 Shares convertible into 100,000
Ordinary shares 10,000,000
12. Kai company provides the following data for the entire The basic loss per share should be
year: a. 27.50 c. 22.00
Profit P10,000,000 b. 25.00 d. 22.50
Ordinary share capital, P100 par
400,000 shares 40,000,000 Use the following information for the next questions.

Options and warrants outstanding during the entire
year:
Option shares
Exercise price
Average market price
Ending market price
Diluted earnings per share should be
a. 25.00
b. 24.51
Use the following information for the next two questions.
The information below pertains to Prancer Company.
Profit for the year
8% convertible bonds issued at par
(P1,000 per bond). Each bond is
convertible into 40 ordinary shares
6% convertible, cumulative preference
Shares, P100 par value. Each share
Is convertible into 3 ordinary shares
Ordinary shares, P10 par value
Share options (granted in a prior year)
To purchase 50,000 ordinary shares
At P20 per share
Edmund Halvor of the controller’s office of East Aurora
Corporation was given the assignment of determining the
40,000 basic and diluted earnings per share values for the year
200 ending December 31, 2019
250
400 Additional information
a. The company is authorized to issue 8,000,000, P10 par
value, ordinary shares. As of December 31, 2018,
c. 22.72 3,000,000 shares had been issued and were
d. 23.81 outstanding.
b. The per share market prices of the ordinary shares on
selected dates were as follows.
c. A total of 700,000 shares of an authorized 1,200,000
shares of convertible preferred shares had been issued
on July 1, 2015. The share was issued at its par value of
P25, and it has a cumulative dividend of P3 per share.
1,200,000
The share is convertible into ordinary shares at the
rate of one shares of convertible preference for one
share of ordinary. The rate of conversion is to be
2,000,000
automatically adjusted for share splits and share
dividends. Dividends are paid quarterly on September
30, December 31, March 31, and June 30.
3,000,000
d. East Aurora Corporation is subject to a 40% income tax
6,000,000
rate.
e. The after-tax profit for the year ended December 31,
2019 was P13,550,000.
500,000
The following specific activities took place during 2019.
1. January 1 – A 5% ordinary share dividend was issued.
The dividend had been declared on December 1, 2018,
to all shareholders of record on December 29, 2018.
2. April 1 – a total of 200,000 preference shares was
converted into ordinary shares. The company issued
new ordinary shares and retired the preference shares.

3. July 1 – a 2-for-1 ordinary share split became effective

on this date. The board of directors had authorized the
split on June 1.
4. August 1 – a total of 300,000 ordinary shares were
issued to acquire a factory building.
5. November 1 –a total of 24,000 ordinary shares were
purchased on the open market at P9 per share. These
shares were to be held as treasury shares and were
still in the treasury as of December 31, 2019.
6. Ordinary share cash dividend – cash dividends to
ordinary shareholders were declared and paid as
follows.
April 15 – P0.30 per share
October 15 – P0.20 per share
7. Preference shares cash dividends – cash dividends to
preference shareholders were declared and paid as
scheduled.

16. Determine the number of shares used to compute

basic earnings per share for the year ended
December 31, 2019
a. 6,736,000 c. 6,763,000
b. 6,367,000 d. 6,637,000

17. The basic earnings per share should be

a. 2.01 c. 2.00
b. 1.77 d. 2.04

18. Determine the number of shares used to compute

diluted earnings per share for the year ended
December 31, 2019
a. 7,891,000 c. 7,836,000
b. 7,981,000 d. 7,286,000

19. The diluted earnings per share should be

a. 1.72 c. 1.73
b. 1.70 d. 1.86