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Book value per share answer key

BS in Accountancy (Saint Mary's University Philippines)

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BOOK VALUE AND PREFERENCE DIVIDENDS

Problem 27-1
Tarr Company reported the following shareholders’ equity on December 31, 2015 :

Preference Share capital - 12%, 50 par, 20,000 shares 1,000,000

Ordinary Share capital, P25 par, 100,000 shares 2,500,000
Share Premium 200,000
Retained Earnings 400,000
Retained Earnings appropriated 100,000
Revaluation Surplus 300,000

Dividends on preference share have not been paid since 2013. The preference share has a
liquidating value of P55 and a call price of P58.
What is the Book Value per preference share ?

a. 61
b. 56
c. 55
d. 58

Solution :
Preference Share 1,000,000
Liquidation Premium - excess of liquidating value over par
(20,000 x 5) 100,000
Preference Dividend for current year (1,000,000 x 12%) 120,000
Total Preference shareholder’s equity 1,220,000

Book Value per preference share (1,220,000/20) 61

Problem 27-2

Hoyt Company rwported the following shareholders equity at year end :

5% cumulative preference share capital, par value

P100 per share: 25,000 shares issued and outstanding 2,500,000
Ordinary Share Capital , par value P35 per share
100,000 shares issued outstanding 3,500,000
Share Premium 1,250,000
Retained Earnings 3,000,000

Dividends in arrears on the preference share amounted to P250,000 . If the entity were to
be liquidate, the preference shareholders would receive par value plus a premium of
P500,000.

What is the book value per ordinary share ?

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a. 77.50
b. 75.00
c. 72.50
d. 70.00

Solution :

Total shareholder’s equity 10,250,000

Preference Shareholder’s Equity
Preference share capital 2,500,000
Preference dividends in arrears 250,000
Liquidation premium 500,000 3,250,000
Ordinary Shareholder’s equity 7,000,000
Divide by ordinary shares outstanding 100,000
Book Value per ordinary share 70.00

Problem 27-3

Dix Company reported the following shareholder’s equity on December 31, 2015 :

8% cumulative preference share capital, P50 par,

Liquidating value P55 per share ;
Authorized, isuued and outsanding 20,00o shares 1,000,000
Ordinary share capital, P25 par; 200,000 share authorized;
100,000 shares issued and outstanding 2,500,000
Retained Earnings 400,000

Dividends on preference share have been paid though 2013 but have not declared for
2014 and 2015.

On December 31, 2015, what is the book value per ordinary share?

a. 25.00
b. 27.20
c. 26.40
d. 29.00

Solution :

Total equity 3,900,000

Preference shareholders equity :
Preference share capital 1,000,000
Liquidating premium (20,000 x 5) 100,000
Preference dividend in arrears

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(1,000,000 x 8% x 2) 160,000 1,260,000

2,640,000
100,000
26.40

Problem 27-4

Boe Company reported the following shareholders’ equity on December 31, 2015 :

6% non cumulative preference share capital, P100, par

Liquidation value of P105 per share 1,000,000
Ordinary Share capital, P100 par
Retained Earnings 950,000

Preference dividends have paid up to December 31,2015 what is the book value per
ordinary share ?

a. 131.70
b. 130.00
c. 129.70
d. 128.00

Solution:

Total shareholder’s Equity 4,950,000

Preference shareholders’ equity :
Preference Share Capital 1,000,000
Liquidation Premium (10,000x50) 50,000 1,050,000
Ordinary Shareholder’s equity 3,090,000
Divide by ordinary shares 30,000
Book value per ordinary share 130

Problem 27-5

Nike Company paid cash dividends of P600,000 and reported net income of P1,550,000.
The ordinary share holders equity at year ended was P5,000,000. The ordinary shares
outstanding. What is the book value per ordinary share ?

a. 25.00
b. 22.00
c. 3.00
d. 7.75

Solution :
Book value per ordinary share (5,000,000/200,000 shares) 25

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Problem 27-6

Lawin Company provided the following information for 2014 and 2015:

Ordinary shareholders equity, December 31, 2014 4,400,000

Ordinary shareholders equity, December 31, 2015 5,000,000
Outstanding Ordinary Share, December 31, 2015 160,000
Preference Dividends paid for 2015 100,000

What is the book value per ordinary share for 2015 ?

a. 27.50
b. 31.25
c. 30.62
d. 26.88

Solution :
Book value per ordinary share (5,000,000/160,000) 31.25

Problem 27-7

On December 31, 2015 and 2016, Can Company had outstanding 40,000 6 % cumulative
preference shares of P100 par value and 200,000 ordinary shares of P10 par value. On
December 31, 2015 preference dividends in arrears amounted to P120,00. Cash dividends
declared in 2016 totaled P440,000.
What amount should be reported as dividend payable to preference and ordinary shares,
respectively in 2016 ?

a. 440,000 and 0
b. 360,000 and 80,000
c. 320,000 and 120,000
d. 240,000 and 200,000

Solution :

Total dividend declared 440,000

Preference Dividends
In arrears on December 31, 2015 120,000
2016 dividend (6% x 4,000,000) 240,000 360,000
Balance to ordinary share 80,000

Problem 27-8

Marie company had outstanding 50,000 8% preference share with 100 par value and
125,000 P30par value ordinary shares. Dividends have been paid every year except last

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year and the current year. The preference shares are cumulative and non-participating.
The entity distributed P2,500,000 as dividend in the current year .

What is the dividend payable to the ordinary shareholders?

a. 2,100,000
b. 1,700,000
c. 2,500,000
d. 0

Solution :
Total dividends distributed in the current year 2,500,000
Preference dividend (8% x 5,000,000 x 2) (800,000)
1,700,000

Problem 27-9

Lawin Company provided the following information for 2014 and 2015:

Ordinary shareholders equity, December 31, 2014 4,400,000

Ordinary shareholders equity, December 31, 2015 5,000,000
Outstanding Ordinary Share, December 31, 2015 160,000
Preference Dividends paid for 2015 100,000

What is the book value per ordinary share for 2015 ?

a. 27.50
b. 31.25
c. 30.62
d. 26.88

Solution :
Book value per ordinary share (5,000,000/160,000) 31.25

Problem 27-10

Wendy Company had outstanding 300,000 ordinary shares of P20 par and 60,000
preference shares no-par 8 % with a stated value of P50. The preference shares are
cumulative and nonparticipating. Dividends have been paid in every except the past two
years and the current year. The entity paid dividend of P500,000 in the current year.

What is the dividend payable to the preference shareholders in the current year ?

a. 500,000
b. 480,000

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c. 240,000
d. 720,000

Solution :

The dividend of 500,000 is paid to preference only because the total preference dividends
amount to 8% x P3,000,000 or P720,000

Problem 27-11

Segunda Company reported the following shareholders equity at year end :

5% cumulative preference share capital, par value

P100 per share: 25,000 shares issued and outstanding 2,500,000
Ordinary Share Capital , par value P35 per share
100,000 shares issued outstanding 3,500,000
Share Premium 1,250,000
Retained Earnings 3,000,000

Dividends in arrears on the preference share amounted to P250,000 . If the entity were to
be liquidate, the preference shareholders would receive par value plus a premium of
P500,000.

What is the book value per ordinary share ?

a. 77.50
b. 75.00
c. 72.50
d. 70.00

Solution :

Total shareholder’s equity 10,250,000

Preference Shareholder’s Equity
Preference share capital 2,500,000
Preference dividends in arrears 250,000
Liquidation premium 500,000 3,250,000
Ordinary Shareholder’s equity 7,000,000
Divide by ordinary shares outstanding 100,000
Book Value per ordinary share 70.00

Problem 27-12

On December 31,2014 and 2015, Apex Company had 30,000 P100 par value 5%
cumulative preference shares outstanding. No dividends were in arrears on December 31,
2015, the entity did not declare a dividend of P100,000 on the preference shares.

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How is the preference dividend in arrears reported in 2015?

a. Accrued liability of P150,000

b. Disclosure of P150,000
c. Accrued liability of P200,000
d. Disclosure of P200,000

Solution :
Preference share capital (30,000 x 100) 3,000,000

Preference dividend in 2014(3,000,000 x 5%) 150,000

Preference dividend in 2015 150,000

Total preference dividend 300,000

Less: Preference dividend in 2015 100,000
Preference Dividends in arrears-December 31, 2015 200,000

Problem 27-13

The directors of Lora Company wish to declare a dividend whereby ordinary

shareholders are to receive a total per share dividend of P4. The shareholders’ equity at
year-end appears as follows :

Preference share capital, P100 par, 7% participating up

To 10%, non-cumulative, 100,000 shares authorized,
25,000 shares issued 2,500,000
Ordinary Share Capital, P25 par, 250,000 shares
Authorized and Issued 6,250,000
Share Premium 1,250,000
Retained Earnings 5,000,000

What is the total amount of the dividend that must be declared to meet the per share goal
of the board of directors ?

a. 1,175,000
b. 1,700,000
c. 1,000,000
d. 1,250,000

Solution :

Ordinary dividend (250,000 x 4) 1,000,000

Preference dividend (2,500,000 x 10%) 250,000
Total Dividend 1,250,000

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Problem 27-14

Bonanza Company provided the following shareholders equity on December 2015

Preference share capital, P100 par, 80 shares issued,

12% cumulative and fully participating 8,000,000
Ordinary share capital, P50 par, 200,000 shares issued 10,000,000
Share Premium 5,000,000
Retained Earnings 7,000,000

Dividends on the preference shares are in arrearsfor two years including the current year.
On December 31, 2015 the entity intends to pay cash dividend of P10 per share to the
ordinary shareholders

What is the total amount of dividends to be declared for the preference and ordinary
shares ?

a. 4,560,000
b. 3,920,000
c. 3,600,000
d. 5,520,000

Solution :

Ordinary dividend(200,000 x 10) 2,000,000

Preference Dividends
2014(12% x 8,000,000) 960,000
2015(20 % x 8,000,000) 1,600,000 2,560,000
4,560,000

Problem 27-15

Yodel company had 50,000 ordinary shares of P100 par value and 25,000 preference
shares of P100 par value, 6% cumulative and participating. Dividends on the preference
shares are two years in arrears including the current year. The entity distributed
P1,350,000 as dividends in the current year.

What is the dividend payable to the ordinary shareholders?

a. 1,050,000
b. 1,200,000
c. 800,000
d. 550,000

Solution :

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Dividends Preference Ordinary

Amount 1,350,000
6% x 2,500,00 x 2 (300,000) 300,000
6% x 5,000,000 (300,000) 300,000

Balance prorata 750,000 250,000 500,000

550,000 800,000

Basic Earnings Per Share

Problem 28-1
On December 31, 2015 and 2014, Gow Company had 100,000 ordinary shares and
10,000 cumulative preference shares of 5%, P100 par value. No dividends were declared
on either the preference or ordinary shares in 2015 or 2014. Net income for the current
year was P900,000.

What is the amount reported as basic earnings per share?

a. 8.50
b. 9.50
c. 9.00
d. 5.00

Solution :

Preference Share Capital (10,000 x P100) 1,000,000

Net income 900,000

Preference dividend(1,000,000 x P15%) (50,000)

Net Income to ordinary Shares 850,000

Basic Earnings per share (850,000/100,000 ordinary shares) 8.50

Problem 28-2

Madden Company had 500,000 ordinary shares issued and outstanding on December 31,
2014. During 2015, no additional ordinary shares were issued. On January 1, 2015, the
entity issued 400,000 non cumulative and non convertible preference share shares.
During 2015, the entity declared and paid P200,000 cash dividends on the ordinary share
and P110,000 annual dividend on the preference share. Net Income for 2015 was
750,000.

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What is the amount should be reported as basic earnings per share ?

a. 1.88
b. 1.60
c. 1.28
d. 1.50

Solution :
Net Income 750,000
Preference Dividends (110,000)

Net Income to ordinary shares 640,000

Basic earnings per share (640,000/500,000) 1.28

Problem 28-3

Martinez Company had 500,000 ordinary shares and 70,000 cumulative preference shares
of 10%, P100 par value. No dividends were declared on either the preference or ordinary
shares in 2015 or 2014. Net income for the current year was P800,000

What is the amount reported as basic earnings per share?

a. 5.00
b. 1.65
c. 1.25
d. 5.25

Solution :
Preference Share Capital (70,000 x P100) 7,000,000

Net income 800,000

Preference dividend(1,000,000 x P15%) (50,000)

Net Income to ordinary Shares 750,000

Basic Earnings per share (750,000/500,000 ordinary shares) 1.25

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Problem 28-4

Royal Company reported the following capital structure on January 1, 2015 :

Shares issued and outstanding

Ordinary Share Capital 200,000
Preference Share Capital 50,000

On October 1, 2015, the entity issued a 10% stock dividend on ordinary shares, and paid
the annual cash dividend of P200,000 on preference shares. The preference shares are non
cumulative, non participating and non convertible. Net income for the year ended
December 31, 2014 was P1,920,000.

What is the amount should be reported as basic earnings per share ?

a. 8.20
b. 8.72
c. 9.36
d. 7.82

Solution :
Ordinary Shares-January 1, 2015 200,000
Stock Dividends on October 1, 2015 20,000
Total ordinary shares outstanding 220,000

Net income 1,920,000

Preference Dividends (200,000)
1,720,000

Basic EPS (1,720,000/220,000) 7.82

Problem 28-5

Ute Company had the following capital structure during 2014 and 2015:

Preference share capital, P10 par, 4 % cumulative,

25,000 shares issued and outstanding 250,000
Ordinary Share capital, P5 par, 200,000 shares
Issued and outstanding 1,000,000

The entity reported net income of P500,000 for the year ended December 31, 2015. The
entity paid no preference dividends during 2014 and paid P16,000 in preference
dividends during 2015.

What amount should be reported as basic earnings per share?

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a. 2.42
b. 2.45
c. 2.48
d. 2.50

Solution:

Net Income 500,000

Preference dividend for one year(250,000 x 4%) (10,000)
Net Income to ordinary shares 490,000

Basic Earnings Per Share (490,000/200,000) 2.45

Problem 28-6

Canyon Company reported in the financial statements for the year ended December 31,
2015 basic earnings per share of P85. On July 1, 2016 the entity made a 3 for 1 bonus
issue.

What amount of earnings per share for 2015 should be reported as comparative
information in the financial statement for 2016 ?

a. 21.25
b. 37.50
c. 34.00
d. 28.30

Solution :
Basic Earnings per share – 2015 (85/4) 21.25

Problem 28-7

Smart Company reported profit before tax of P5,800,000 and income tax expense of
P1,500,000 for the current year. In addition, the entity paid during the year an ordinary
dividends of P400,000 and preference dividends of P500,000 on the redeemable
preferences share. The entity had P1,000,000 of P5 par value ordinary share in issue.

What amount should be reported as basic earnings per share for the year ?

a. 21.50
b. 19.00
c. 8.60
d. 7.60

Solution :

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Ordinary Share Outstanding (1,000,000/5) 200,000

Basic Earnings per share (4,300,000/200,000) 21.50

Problem 28-8

During the current year, Globe Company had the following two classes of share capital
issued and outstanding for the entire year :

Ordinary share capital, 200,00 shares, P10 par 2,000,000

Preference Share capital, 2,000 shares, P1000 par,
12% convertible share for share into ordinary share 200,000

The net income for the current year was P1,800,000 and the net income tax rate was 30 %

In the computation of basic earnings per share, what is the amount to be used as
earnings ?

a. 1,824,000
b. 1,776,000
c. 1,224,000
d. 1,800,000
There was no SOLUTION

Problem 28-9

During the current year, Innova Company had outstanding 200,000 ordinary shares and
20,000 cumulative preference shares with a P10 per share dividend. Each preference
share is convertible into five ordinary shares. The entity had a P3,000,000 net loss for the
year. No dividends were paid or declared.

What amount should be reported as basic loss per share?

a. 15.00
b. 16.00
c. 10.00
d. 10.67

Solution :

Net Loss 3,000,000

Preference Dividends (20,000 x 10 ) 200,000

Total loss to ordinary shares 3,200,000

Basic loss per share (3,200,000/200,000) 16.00

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Problem 28-10

United company reported the following data at year end :

8% cumulative preference share capital, P50 par value 4,500,000

Ordinary share capital, P1 par, 10,000,000 shares 10,000,000
Share premium 20,500,000
Retained Earnings 132,000,000
Net income for the current year, including an
expropriation loss of P8,000,000 35,000,000

What amount should be reported as basic earnings per share ?

a. 3.46
b. 4.04
c. 4.63
d. 4.67

Solution :

Net Loss 35,000,000

Preference Dividends (4,500,000 x 8% ) (360,000)

Total loss to ordinary shares 34,640,000

Basic loss per share (34,640,000/10,000,000) 3.46

Problem 28-11

On January, Pink Company had 200,000 ordinary shares and 100,00 4 % P100 par value
cumulative preference shares outstanding. No dividends were declared on either the
preference or ordinary shares in 2014 and 2015. On February 10, 2016, prior to the
issuance of the financial statements for the year ended December 31, 2015, the entity
declared a 100% share split on ordinary shares. Net income for 2015 was P7,500,000.

What is amount should be reported as basic earnings per share ?

a. 35.50
b. 37.50
c. 17.75
d. 18.75

Solution :

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Net Loss 7,500,000

Preference Dividends (4% x 10,000,000 (400,000)

Net income to ordinary shares 7,100,000

Divide by ordinary shares (200,000 + 200,000) 400,000

Basic EPS 17.75

Problem 28-12

The income statement of laguna Company for the current year showed net income of
P15,000,000. The net income for reflects an income tax rate of 30%. The net income
included a casually loss of P5,000,000 before income tax. The entity reported the
following shareholders equity at year ended :

Prefrence share capital 10% cumulative, P50

Par value, 100,000 shares 5,000,000
Ordinary share capital, P100 par value 30,000,000
Share premium 10,000,000
Retained earnings 18,000,000
Treasury ordinary shares, 50,000 at cost 4,000,000

What amount should be reported as basic earnings per share ?

a. 58.00
b. 60.00
c. 73.60
d. 48.33

Solution :

B EPS (!4,500,000/250,000) 58.00

Problem 28-13

On January 1, 2015, Sabina Company had ordinary share capital outstanding of P100 par
value, 200,000 shares or a total par value of P20,000,000. On July 1, 2015, a bonus issue
was made in the ratio of one additional ordinary share for each original share. The net
income for the current year was P12,000,000.

What amount should be reported as B EPS ?

a. 30
b. 40

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c. 20
d. 60

Solution :

Ordinary Shares 200,000

Bonus Issue 200,000
Total ordinary shares 400,000

Basic EPS (12,000,000/400,000) 30

Problem 28-14

On January 1, 2015, Holloween Company had ordinary share capital outstanding of P100
par value, 600,000 shares or a total par value of P20,000,000. On July 1, 2015, a bonus
issue was made in the ratio of one additional ordinary share for each original share. The
net income for the current year was P48,000,000.

What amount should be reported as B EPS ?

a. 30
b. 40
c. 20
d. 60

Solution :

Ordinary Shares 600,000

Bonus Issue 200,000
Total ordinary shares 800,000

Basic EPS (48,000,000/800,000) 60

Problem 28-15

Lloizza Company had the following capital structure during 2014 and 2015:

Preference share capital, P10 par, 4 % cumulative,

25,000 shares issued and outstanding 250,000
Ordinary Share capital, P5 par, 200,000 shares
Issued and outstanding 1,000,000

The entity reported net income of P500,000 for the year ended December 31, 2015. The
entity paid no preference dividends during 2014 and paid P16,000 in preference
dividends during 2015.

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What amount should be reported as basic earnings per share?

a. 2.42
b. 2.45
c. 2.48
d. 2.50

Solution:

Net Income 500,000

Preference dividend for one year(250,000 x 4%) (10,000)
Net Income to ordinary shares 490,000

Basic Earnings Per Share (490,000/200,000) 2.45

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PAS 33-Earnings Per Share

Accountancy (Ramon Magsaysay Technological University)

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CHAPTER 31
PAS 33- EARNINGS PER SHARE
BASIC EARNINGS PER SHARE
Simple Problems

PROBLEM 31-1 (AICPA Adapted)

On December 31, 2019 and 2018, Gow Company had 100,000 ordinary
shares and 10,000 cumulative preference shares of 5%, P100 par value.
No dividends were declared on either the preference or ordinary shares
in 2019 or 2018. Net income for the current year was P900,000. What
amount should be reported as basic earnings per share?
A. 8.50
B. 9.50
C. 9.00
D. 5.00
Answer. A. 8.50

Preference share capital (10,000 x P100) 1,000,000

Net income. 900,000

Preference dividends (1,000,000 x 5%) (50,000)
Net income to ordinary shares. 850,000

BASIC EARNINGS PER SHARE (850,000/100,000 ordinary shares) P8.50

Whether cumulative or noncumulative, only one year preference

dividend is deducted from net income.
If cumulative, the preference dividend is deducted regardless of
declaration.
If noncumulative, the preference dividend is deducted only when
declared.

PROBLEM 31-2(AICPA Adapted)

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Royal Company reported the ff. capital structure on Jan. 1, 2019:

Shares issued and outstanding

Ordinary share capital 200,000
Preference share capital. 50,000

On October 1, 2019, the entity issued a 10% share dividends on ordinary

shares and declared the annual cash dividend of P200,000 on preference
shares. The preference shares are noncumulative, nonparticipating and
nonconvertible.
Net income for the year ended December 31, 2019 was P1,920,000.
What amount should be reported as basic earnings per share?
A. 8.20
B. 8.72
C. 9.36
D. 7.82
Answer: D. 7.82

Ordinary shares - January 1, 2019 200,000

Share dividends on October 1, 2019(10% x 200,000) 20,000
Total ordinary share outstanding 220,000

Net income 1,920,000

Preference dividend (200,000)
Net income to ordinary shares 1,720,000

BASIC EARNINGS PER SHARE (1,720,000 / 220,000) P7.82

Note that the preference shares are noncumulative but the annual
preference dividend is deducted from net income because it was declared
during the year.
Otherwise, the annual preference dividend is ignored in the absence of
declaration.
PROBLEM 31-3 (AICPA Adapted)

Ute Company had the following capital structure during 2019:

Preference share capital, P10 par, 4% 250,000

cumulative, 25,000 shares issued and
outstanding
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Ordinary share capital, P5 par value, 200,000 1,000,000

shares issued and outstanding

The entity reported net income of P500,000 for the year ended December
31, 2019.

The entity paid no preference dividends during 2018 and paid P16,000
preference dividends during 2019

What amount should be reported as basic earnings per share?

a. 2.42
b. 2.45
c. 2.48
d. 2.50
Answer: b. 2.45

Net income 500,000

Preference dividend for 1 year(250,000 x 4%) (10,000)
Net income to ordinary shares 490,000

BASIC EARNINGS PER SHARE (490,000/200,000) P2.45

PROBLEM 31-4 (IFRS)

Smart Company reported a profit before tax of P5,800,000 and income tax expense
of P1,500,000 for the current year.
The entity paid during the year an ordinary dividend of P400,000 and a preference
dividend of P500,000 on the preference shares.
The entity had a P1,000,000 of P5 par value ordinary shares in issue.

1. What amount should be reported as basic earnings per share if the

preference shares are redeemable?
A. 21.50
B. 19.00
C. 8.60
D. 7.60

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Answer: A. 21.50

Ordinary share outstanding (1,000,000/5) 200,000

BASIC EARNINGS PER SHARE (4,300,000/200,000) P21.50

The preference dividend is ignored because the preference shares are redeemable
and considered as financial liability.
The preference dividend of P500,000 is already deducted from the net income as a
finance cost.

2. What amount should be reported as basic earnings per share if the

preference shares are nonredeemable?
A. 29.00
B. 19.00
C. 21.50
D. 16.50
Answer: B. 19.00
Net income 4,300,000
Preference dividend (500,000)
Net income to ordinary share 3,800,000

BASIC EPS (3,800,000/200,000) P19.00

In the absence of any contrary statements, the preference shares are
nonredeemable.

PROBLEM 31-5 (IAA)

On January 1, 2019, Pink Company had 200,000 ordinary shares and

100,000 4% P100 par value cumulative preference share outstanding.
No dividends were declared on either the preference or ordinary shares
in 2018 and 2019.
On December 31, 2019, the entity declared a 100% share dividend on
ordinary shares.

Net income for 2019 was P7,500,000.

What amount should be recorded as basic earnings per share?

A. 35.50
B. 37.50
C. 17.75
D. 18.75

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Answer: C. 17.75
Net income 7,500,000
Preference dividend (4% x 10,000,000) ( 400,000)
Net income to ordinary shares 7,100,000
Divided by ordinary shares 400,000
BASIC EARNINGS PER SHARE P 17.75

Original ordinary shares 200,000

Share dividend (100%) 200,000
Total ordinary shares 400,000

The share split should be retroactively applied to the earliest period

presented.
Note also that the share split occurred prior to the issuance of the
financial statements.
Otherwise, if the share split occurred after the issuance of the financial
statements, the share split is ignored.
PROBLEM 31-6 (IAA)
Laguna Company reported net income of P15,000,000 for the current
year. The entity showed the following shareholder’s equity at year-end:

Preference share capital 10% cumulative, P50 5,000,000

par value, 100,000 shares
Ordinary share capital, P100 par value, 300,000 30,000,000
shares
Share premium 10,000,000
Retained earnings 18,000,000
Treasury ordinary shares, 50,000 at cost 4,000,000

What amount should be reported as basic earnings per share?

A. 58.00
B. 60.00
C. 73.60
D. 48.33
Answer: a. 58.00

Ordinary Shares issued (30,000,000 / 100 par value) 300,000

Treasury shares ( 50,000)

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Ordinary shares outstanding 250,000

Net income 15,000,000

Preference dividend (5,000,000 x 10%) ( 500,000)
Net income to ordinary shares 14,500,000

BASIC EPS(14,500,000 / 250,000) P58.00

Note that the numerator is net income reflecting all items including in
profit or loss, such as casualty cost.

PROBLEM 31-7 (IFRS)

On January 1, 2019, Sabina Company had ordinary share capital
outstanding of P100 par value, 200,000 shares or a total par value of
P20,000,000.
On July 1, 2019, a bonus issue was made in the ratio of one additional
ordinary share for each original share. The net income for the current
year was P12,000,000.
What amount should be reported as basic earnings per share?
A. 30
B. 40
C.60
D. 20
Answer: A. 30

January 1 Ordinary shares 200,000

July 1 Bonus issue 200,000
Total ordinary shares 400,000

EARNINGS PER SHARE (12,000,000/400,000) P30.00

The bonus issue is the equivalent of a share dividend.

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PROBLEM 31-8 (Application Guidance PAS 33)

On January 1, 2019, Gina Company had 300,000 ordinary shares
outstanding, P100 par value or a total par value of P30,000,000.
During 2019, the entity issued rights to acquire one ordinary share at
P100 in the ratio of one share for every 5 shares held.
The rights are exercised on March 31, 2019. The market value of each
ordinary share immediately prior to March 31, 2019 was P160.
The net income for 2019 was P6,000,000.
What amount should be reported as basic earnings per share?
A. 17.14
B. 16.67
C. 18.75
D. 17.39

Answer: A. 17.14

Theoretical Value of Rights

Value of one rights = Market value of share right on – subscription price

Number of rights to purchase one share + 1

Applying the formula for the theoretical value of rights is

= 160-100 / 5+1
=60/6
=P10 per right

Market value of shares-right on 160

Theoretical Value of rights 10
Market value of share ex-right. 150

Adjustment factor 160/150

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The number of ordinary shares outstanding prior to the exercise of the

rights is multiplied by an adjustment factor whose numerator is the
market value of the share rights-on and the denominator is the market
value of the shares ex-right.

Ordinary shares- January 1 300,000

Ordinary shares issued thru exercise of rights on March 60,000
31, 2019 (300,000 /5)
Total ordinary shares on March 31 360,000

January 1 300,000 x 160/150 x 3/12 80,000

March 31 300,000 x 9/12 270,000
Average number of shares 350,000

Basic EPS ( 6,000,000 / 350,000) P17.14

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PROBLEM 31-9 (Application Guidance PAS 33)

On January 1, 2019, Excel Company had 600,000 ordinary shares
outstanding.
During 2019, the entity issued rights to acquire one ordinary share at P10
in the ratio of one new share for every 4 shares outstanding
The rights are exercised on October 1, 2019. The market value of the
ordinary share immediately prior to the rights issue is P35.
The net income for the year is P8,550,000.
What amount should be reported as basic earnings per share?
A. 11.40
B. 12.00
C. 14.25
D. 13.41
Answer: B. 12.00

Applying the formula for the theoretical value of rights is

= 35-10 / 4+1
=25/5
=P5 per right

Market value of shares-right on 35

Theoretical Value of rights 5
Market value of share ex-right. 30
Adjustment factor 35/30

Ordinary shares- January 1 600,000

Ordinary shares issued thru exercise of rights on October 150,000
1, 2019 (600,000 /4)
Total ordinary shares on October 1 750,000

January 1 600,000 x 35/30 x 9/12 525,000

March 31 750,000 x 3/12 187,500
Average number of shares 712,500

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Basic EPS ( 8,550,000 / 712,500) P12.00

PROBLEM 31-10 (IAA)

During the current year, Innova Company had outstanding 200,000
ordinary shares and 20,000 cumulative preference shares with a P10 par
share dividend.

The entity had a P3,000,000 net loss for the year. No dividends were
declared or paid.

What amount should be reported as basic loss per share?

A. 15.00
B. 16.00
C. 10.00
D. 10.67
Answer: B. 16.00

Net loss 3,000,000

Preference dividend (20,000 x 10) 200,000
Total loss to ordinary shares 3,200,000

BASIC LOSS PER SHARE (3,200,000/ 200,000) P16.00

The annual preference dividend is added to the net loss to get the total
loss attributable to the ordinary shares.

CHAPTER 32

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Basic EARNINGS PER SHARE

Average shares
PROBLEM 32-1 (AICPA Adapted)
Jet Company provided the ff. information for the current year:

January 1 Shares outstanding 200,000

April 1 2-for-1 share split 200,000
July 1 Shares issued 100,000

What is the average number of shares?

A. 400,000
B. 450,000
C. 500,000
D. 540,000

Answer: B. 450,000
January 1 200,000 x 2 x 12/12 400,000
July 1 100,000 x 6/12 50,000
450,000

The share split is recognized retroactively, meaning, it is treated as a

change from the date of original shares are issued.
Thus, the balance of 200,000 shares on January 1 would become 400,000
as a result of a 2-for-1 share split.

PROBLEM 32-2 (AICPA Adapted)

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Timp Company had the ff. transactions during the year:

January 1 Ordinary shares outstanding 300,000
February 1 Issued a 10% share dividend 30,000
March 1 Issued ordinary shares in a business 90,000
combination
July 1 Issued ordinary shares for cash 80,000
December 1 Ordinary shares outstanding 500,000

What is the weighted average number of shares outstanding?

A. 400,000
B. 442,000
C. 445,000
D. 460,000

Answer: C. 445,000
January 1 300,000x 1.10 x 12/12 330,000
March 1 90,000 x 10/12 75,000
July 1 80,000 x 6/12 40,000
Average number of shares 445,000

The share dividend is treated as a change from the date of original shares
are issued.
Thus, the balance of 300,000 on January 1 would become 330,000 shares.

PROBLEM 32-3 (IAA)

Sharon Company provided the ff. information in relation to share capital
for the current year:
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January 1 Shares outstanding 1,250,000

April 1 Shares issued 200,000
October 1 Treasury shares purchased 100,000
December 1 Issued a 100% share dividend

What is the amount of weighted average shares?

A. 2,700,000
B. 2,775,000
C. 2,750,000
D. 1,350,000
Answer: C. 2,750,000
January 1 1,250,000 x 200% 2,500,000
April 1 200,000 x 200% x 9/12 300,000
October 1 100,000 x 200% x 3/12 (50,000)
Average number of shares 2,750,000

PROBLEM 32-4 (IAA)

At the beginning of the current year, Nissan Company had 200,000
ordinary shares outstanding. During the current year, the following events
occured:
March 1 2-for-1 share split
June 1 Issued 30,000 additional shares
September 1 20% share dividend

What is the weighted average number of shares outstanding?

A. 276,000
B. 261,000
C. 230,000
D. 256,000

Answer: B. 261,000
January 1 100,000 x 2 x 1.20 x 12/12 240,000
June 1 30,000 x 1.20 x 7/12 21,000
Average number of shares 261,000

PROBLEM 32-5 (IAA)

Shane Company had 100,000 ordinary shares issued and outstanding at
the beginning of the year.

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During the current year, the entity had the ff. ordinary shares
transactions:

April 1 Issued 30,000 previously unissued shares

May 1 Split the share 2 for 1
June 30 Purchased 10,000 shares for the treasury
July 31 Distributed a 20% share dividend
December 31 Split the share 3 for 1

What is the weighted average number of shares that should be used in

calculating earnings per share?
A. 288,000
B. 864,000
C. 882,000
D. 972,000

Answer: B. 864,000

January 1 100,000 x 2 x 1.20 x 3 x 12/12 720,000

April 1 30,000 x 2 x 1.20 x 3 x 9/12 162,000
June 30 10,000 x 1.20 x 3 x 6/12 (18,000)
864,000

The January 1 balance is adjusted for the 2 for 1 split, 20% share dividend
and 3 for 1 split.
The April 1 issue is adjusted for 2 for 1 split, 20% share dividend and 3 for
1 share split.
The June 30 treasury shares are adjusted for the 20% share dividend and
3 for 1 share split.

PROBLEM 32-6 (IAA)

Helen Company provided the ff. share transactions for the current year:
January 1 Shares outstanding 44,000
February 1 Issued for cash 56,000
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May 1 Acquired treasury shares 25,000

August 1 25% share dividend
September 1 Resold treasury shares 10,000
November 1 Issued 3 for 1 share split

What is the weighted average number of shares for EPS computation?

A. 305,000
B. 307,500
C. 103,750
D. 311,250

Answer: A. 305,000

January 1 44,000 x 1.25 x 3 x 12/12 165,000

February 1 56,000 x 1.25 x 3 x 11/12 192,500
May 1 25,000 x 1.25 x 3 x 8/12 (62,500)
September 1 10,000 x 3 x 4/12 10,000
305,000

The January 1 balance is adjusted for the 25% share dividend and 3 for 1
split.
The February 1 issue is adjusted for 2 for 25% share dividend and 3 for 1
share split.
The May 1 treasury shares are adjusted for the 25% share dividend and 3
for 1 share split.
The September 1 resold of treasury is adjusted for the 3 for 1 split.

PROBLEM 32-7 (IAA)

Wisconsin Company had 250,000 ordinary shares outstanding on January
1, 2019.
During 2019 and 2020, the ff. transactions took place:
2019 March 1 Sold 24,000 shares
July 1 Issued a 20% share dividend
October 1 Sold 16,000 shares
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December 1 Purchased 15,000 shares to be held in

treasury

2020 June 1 3 for 1 share split

September 1 Sold 60,000 shares

1. What is the weighted average number of shares for 2019 to be used in

the earnings per share computation for comparative financial statements
of 2020?
A. 980,250
B. 329,800
C. 984,000
D. 969,000

2. What is the weighted average number of shares for 2020 to be used in

the earnings per share computation for comparative financial statements
of 2020?
A. 1,009,400
B. 1,049,400
C. 1,169,400
D. 989,400

Answer for no. 1- A. 980,250

2019
January 1 250,000 x 1.2 x 3 x 12/12 900,000
March 1 24,000 x 1.2 x 3 x 10/12 72,000
October 1 16,000 x 1.2 x 3/12 12,000
December 1 15,000 x 1.2 x 1/12 (3,750)
980,250

January 1, 2019 250,000

March 1, 2019 24,000
July 1, 2019 (20% x 274,000) 54,800
October 1, 2019 16,000
December 1, 2019 (15,000)
Outstanding shares-December 31, 2019 329,800

Answer for no. 2- A. 1,009,400

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2020
January 1 329,800 x 3 x 12/12 989,400
September 1 60,000 x 4/12 20,000
1,009,400

PROBLEM 32-8
Precise Company had a net income of P15,000,000 for the current year.
The ff. appropriations have not been considered in this amount:

Arrears of cumulative preference divided by 2 years 4,000,000

Ordinary dividends 5,000,000
Preference share premium payable on redemption 1,000,000
Exceptional profit, net of tax 4,000,000

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The entity had 3,000,000 ordinary shares of P1 par value outstanding at

the beginning of the year. The ff. share transactions occured during the
current year:

January 1 Issued at P5 per share, P1 paid to date and 250,000

entitled to participate in dividends to the extent
paid up
April 1 Full market price P3 per share issue 600,000
July 1 Purchase of own shares 400,000

What amount should be reported as basic earnings per share?

A. 4.85
B. 4.57
C. 3.64
D. 3.94

Answer: A. 4.85

Net income per book 15,000,000

Exceptional profit 4,000,000
Adjusted net income 19,000,000
Preference dividend for the current year (4M/2) (2,000,000)
Preference share premium payable on redemption (1,000,000)
Net income to ordinary shares 16,000,000

The preference share premium payable on redemption can be considered

as dividend on participating preference share.

January 1 3,000,000 x 12/12 3,000,000

January 1 250,000 x 1/5 x 12/12 50,000
April 1 600,000 x 9/12 450,000
July 1 400,000 x 6/12 (200,000)
Average shares 3,300,000

BASIC EARNINGS PER SHARE 4.85

(16,000,000/3,300,000)

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PROBLEM 32-9 (AICPA Adapted)

Strauch Company had one class of ordinary share capital outstanding and
no other securities that are potentially convertible into ordinary shares.
During 2019, 100,000 shares were outstanding.
In 2020, two distributions of additional ordinary shares occured:

April 1- 20,000 treasury shares were sold

July 1- A 2-for-1 share split was issued

The net income for 2020 was P4,485,000 and the net income for 2019
was P3,500,000.

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1. What amount should be reported as basic earnings per share for 2020
in the comparative income statement for 2020?
A. 20.50
B. 19.50
C. 22.42
D. 18.69

2. What amount should be reported as basic earnings per share for 2019
in the comparative income statement for 2020?
A. 35.00
B. 17.50
C. 15.22
D. 14.28

Answer for no.1- B. 19.50

January 1, 2020 200,000 x 12/12 200,000
April 1, 2020 20,000 x 2 x 9/12 30,000
Average Shares 230,000
2020 Basic Earnings Per Share (4,485,000/230,000) 19.50

Answer for no.2- B.17.50

Dec 31, 2019 Balance 100,000
July 1, 2020 2-for-1 share split 100,000
Total ordinary shares-Dec.31,2019 200,000
2019 Basic Earnings Per Share(3,500,000/200,000) 17.50

PROBLEM 32-10 (IAA)

On January 1, 2019, Shane Company had 100,000 ordinary shares
outstanding.
The ff. transactions occured during 2019:
March 1 Reacquired 30,000 shares accounted for as treasury
Sept. 1 Sold all treasury shares
Dec. 1 Sold 66,000 new shares for cash
Dec. 31 Reported a net income of P2,600,000

The ff. transactions occured during 2020

Jan. 15 Declared and issued a 25% share dividend
Dec. 31 Reported a net income of P4,000,000

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1. What amount should be reported as basic earnings per share for 2019
for presentation in comparative financial statements on December 31,
2020?
A. 15.88
B. 20.00
C. 20.80
D. 19.90

2. What amount should be reported as basic earnings per share for 2020
for presentation in comparative financial statements on December 31,
2020?
A. 24.10
B. 19.28
C. 30.77
D. 32.00

Answer for No.1- B.20.00

2019
Jan. 1 100,000 x 1.25 x 12/12 125,000
March 1 3,000 x 1.25 x 10/12 (3,125)
Sept.1 3,000 x 1.25 x 4/12 1,250
Dec. 1 66,000 x 1.25 x 1/12 6,875
Average shares outstanding 130,000
2019 Basic Earnings Per Share(2,600,000/130,000) 20.00

Answer for no.2- B.19.28

2020
Jan. 1 Outstanding 100,000
March 1 Treasury shares purchased (3,000)
Sept. 1 Resale of treasury shares 3,000
Dec. 1 New issue 66,000
Ordinary shares-Dec.31,2019 166,000

Average share outstanding for 2020(166,000 x 1.25) 207,500

2020 Basic Earnings Per Share (4,000,000/207,500) 19.28

The 25% share dividend declared and issued on January 15, 2020 should
be treated retroactively.

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CHAPTER 33
DILUTED EARNINGS PER SHARE
Convertible Preference Shares
Convertible Bonds Payable

PROBLEM 33-1 (AICPA Adapted)

Dunn Company had 200,000 ordinary shares of P20 par value and 20,000
shares of P100 par, 6% cumulative, convertible preference share capital
outstanding for the entire current year. Each preference share is
convertible into 5 ordinary shares.
The net income for the current year was P840,000.
What amount should be reported as diluted earnings per share?

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A. 2.40
B. 2.80
C. 3.60
D. 4.20

Answer: B. 2.80

Ordinary share outstanding 200,000

Potential ordinary shares to be issued for conversion of 100,000
preference shares (20,000 x 5)
Total ordinary shares 300,000

Diluted Earnings Per Share (840,000/300,000) 2.80

Under diluted EPS, the annual dividend on the convertible preference

share is no longer deducted from net income because it is assumed that
the preference share is already converted into ordinary shares.

PROBLEM 33-2 (AICPA Adapted)

Cox Company had 1,200,000 ordinary shares outstanding on January 1
and December 31, 2019.
In connection with the acquisition of a subsidiary in previous year, the
entity is required to issue 50,000 additional ordinary shares on July 1,
2020 to the former owners of the subsidiary.
The entity paid P200,000 annual preference dividend in 2019 and
reported a net income of P3,400,000 for the current year.
The preference share capital is noncumulative and nonconvertible.
What amount should be reported as diluted earnings per share?
A. 2.83
B. 2.72
C. 2.67
D. 2.56

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Answer: D. 2.56

Ordinary shares outstanding 1,200,000

Potential ordinary shares to be issued in the acquisition of 50,000
subsidiary
Total ordinary shares 1,250,000

Net income 3,400,000

Preference dividend (200,000)
Net income to ordinary shares 3,200,000

Diluted EPS (3,200,000/1,250,000) 2.56

Note that the preference share is nonconvertible and therefore not a

potential ordinary share.
Thus, the preference dividend paid is deducted from net income.

PROBLEM 33-3 (AICPA Adapted)

Petrock provide the ff. information at year-end:

2018 2019
Original share capital 90,000 90,000
Convertible preference share capital 10,000 10,000

During 2019, Petrock Company paid dividends of P1.00 per ordinary share
and P2.40 for preference share.
The preference share capital is convertible into 20,000 ordinary shares.
The net income for 2019 was P285,000. The income tax rate is 30%.

1. What amount should be reported as basic earnings per share?

A. 3.17
B. 2.90
C. 3.43
D. 2.85

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2. What amount should be reported as diluted earnings per share?

A. 2.53
B. 2.61
C. 2.90
D. 2.51

Answer to no.1- B.2.90

Net income 285,000
Preference dividend (10,000 x 2.40) (24,000)
Net income-ordinary 261,000
Basic Earnings Per Share (261,000/90,000) 2.90

Answer to no.2- D.2.51

Ordinary share outstanding 90,000
Potential ordinary shares-convertible preference 20,000
Total ordinary shares 110,000
Diluted EPS (285,000/110,000) 2.51

PROBLEM 33-4 (IAA)

At the beginning of the current year, Vios Company had 100,000 ordinary
share outstanding.
In addition, the entity had issue 100,000 conertible cumulative 5%
preference share with P100 par at the beginning of the current year.
These preference shares were converted on Sept 1.
Each preference share was converted into 6 ordinary shares.
The preference dividends for the entire year were paid in full before the
conversion.
The entity has no other potentially dilutive securities. Net income for the
current year was P2,000,000.

1. What amount should be reported as basic earnings per share?

A. 16.25
B. 16.67
C. 20.00
D. 19.50

2. What amount should be reported as diluted earnings per share?

A. 12.50

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B. 12.19
C. 16.25
D. 19.50

Answer for no.1- A.16.25

January 1 Outstanding 100,000
September 1 Conversion (10,000 x 6 x 4/12) 20,000
Average share outstanding 120,000
Net income 2,000,000
Preference dividend (1,000,000 x 5%) (50,000)
Net income to ordinary shares 1,950,000

Basic Earnings Per Share (1,950,000/120,000) 16.25

Answer to no.2- A.12.50
January 1 Outstanding 100,000
September 1 Conversion (10,000 x 6) 60,000
Total ordinary shares 160,000

Diluted EPS (2,000,000 / 160,000) 12.50

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Simple problems

Problem 31-1 (AICPA Adapted)

On December 31, 2018 and 2017, Gow Company had 100,000 ordinary shares and 10,000 cumulative preference
shares of 5%, P100 par value.
No dividends were declared on either the preference or ordinary share in 2018 or 2017. Net income for the current
year was P900,000.
What amount should be reported as basic earnings per share?

a. 8.50
b. 9.50
c. 9.00
d. 5.00

Solution 31-1 Answer a

Preference share capital (10,000 x P100) 1,000,000

Net Income 900,000

Preference dividend (1,000,000 x 5%) ( 50,000)

Net income to ordinary shares 850,000

Basic earnings per share

(850,000 / 100,000 ordinary shares) 8.50

Whether cumulative or noncumulative, only one year, preference dividend is deducted from net income.

If cumulative, the preference dividend is deducted regardless of declaration.

If noncumulative, the preference dividend is deducted only when declared.

Problem 31-2 (AICPA Adapted)

Royal Company reported the following capital structure on January 1, 2018:

Shares issued and outstanding

Ordinary share capital 200,000

Preference share capital 50,000

On October 1, 2018, the entity issued a 10% stock dividend on ordinary shares and declared the annual cash
dividend of P200,000 on preference shares.

The preference shares are noncumulative, nonparticipating and nonconvertible.

Net income for the year ended December 31, 2018 was P1,920,000.

What amount should be reported as basic earnings per share?

 a. 8.20
b. 8.72
c. 9.36
d. 7.82

Solution 31-2 Answer d

Ordinary shares – January 1, 2016 200,000

Stock dividend on October 1, 2016 (10% x 200,000) 20,000

Total ordinary shares outstanding 220,000

Net income 1,920,000

Preference dividend (200,000)

Net income to ordinary shares 1,720,000

Basic EPS (1,720,000 / 220,000) 7.82

Note that the preference shares are noncumulative, but the annual preference dividend is deducted from net income
because it was declared during the year.

Otherwise, the annual preference dividend is ignored in the absence of declaration.

Problem 31-3 (AICPA Adapted)

Ube Company had the following capital structure during 2017 and 2018:

Preference share capital, P10 par, 4% cumulative,

25,000 shares issued and outstanding 250,000

Ordinary share capital, P5 par, 200,000 shares

issued and outstanding 1,000,000

The entity reported net income of P500,000 for the year ended December 31, 2018.

The entity paid no preference dividends during 2017 and paid P16,000 in preference dividends during 2018.

What amount should be reported as basic earnings per share?

a. 2.42
b. 2.45
c. 2.48
d. 2.50

Solution 31-3 Answer b

Net income 500,000

Preference dividend for one year (250,000 x 4%) (10,000)

Net income to ordinary shares 490,000

Basic earnings per share (490,000 / 200,000) 2.45

Problem 31-4 (IFRS)

Smart Company reported profit before tax of P5,800,000 and income tax expense of P1,500,000 for the current year.
In addition, the entity paid during the year an ordinary dividend of P400,000 and a preference dividend of P500,000
on the redeemable preferences shares.

The entity had P1,000,000 of P5 par value ordinary shares in issue.

1. What amount should be reported as basic earnings per share?

a. 21.50
b. 19.00
c. 8.60
d. 7.60

2. What amount should be reported as basic earnings per share assuming the preference shares are
nonredeemable?

a. 29.00
b. 19.00
c. 21.50
d. 16.50

Solution 31-4

Question 1 Answer a

Ordinary shares outstanding (1,000,000 / 5) 200,000

Basic earnings per share (4,300,000 / 200,000) 21.50

The preference dividend is ignored because the preference shares are redeemable and considered as financial
liability.

The preference dividend of P500,000 is already deducted from the net income as a finance cost.

Question 2 Answer b

Net income 4,300,000

Preference dividend (500,000)

Net income – ordinary 3,800,000

Basic earnings per share (3,800,000 / 200,00) 19.00

Problem 31-5 (IAA)

On January1, 2018, Pink Company had 200,000 ordinary shares and 100,000 4% P100 par value cumulative
preference shares outstanding.

No dividends were declared on either the preference or ordinary shares in 2017 or 2018
On March 1, 2019, prior to the issuance of the financial statements for the year ended December 31,2018, the entity
declared a 100% share dividend on ordinary shares.

Net income for 2018 was P7,500,000.

What amount should be reported as basic earnings per share?

a. 35.50
b. 37.50
c. 17.75
d. 18.75

Solution 31-5 Answer c

Net income 7,500,000

Preference dividend (4% x 10,000,000) (400,000)

Net income to ordinary shares 7,100,000

Divide by ordinary shares 400,000

Basic EPS 17.75

Original ordinary shares 200,000

Share dividend -100% 200,000

Total ordinary shares 400,000

The share split should be retroactively applied to the earliest period presented.

Note also that the share split occurred prior to the issuance of the financial statements.

Otherwise, if the share split occurred after the issuance of the financial statements, the share split is ignored.

Problem 31-6 (IAA)

Laguna Company reported net income of P15,000,000 for the current year. The net income reflects an income tax
rate of 30%.

The next net income included a casualty loss of P5,000,000 before income tax.

The entity showed the following shareholders’ equity at year end:

Preference share capital 10% cumulative, P50 par value, 100,000 shares 5,000,000
Ordinary share capital, P100 par value 30,000,000
Share premium 10,000,000
Retained earnings 18,000,000
Treasury ordinary shares, 50,000, at cost 4,000,000

What amount should be reported as basic earnings per share?

a. 58.00
b. 60.00
c. 73.60
d. 48.33
Solution 31-6 Answer a

Ordinary shares issued (30,000,000 / 100 par value) 300,000

Treasury shares (50,000)

Ordinary shares outstanding 250,000

Net income 15,000,000

Preference dividend (10% x 5,000,000) (500,000)

Net income to ordinary shares 14,500,000

Basic earnings per share (14,500,000 / 250,000) 58

Note that the numerator is net income reflecting all items included in profit or loss, such as casualty loss.

Problem 31-7 (IAA)

On January 1, 2018, Sabina Company had ordinary share capital outstanding of P100 par value, 200,000 shares or a
total par value of P20,000,000.

On July 1, 2018, a bonus issue was made in the ratio of one additional ordinary share for each original share. The net
income for the current year was P12,000,000

What amount should be reported as basic earnings per share?

a. 30
b. 40
c. 20
d. 60

Solution 31-7 Answer a

January 1 Ordinary share 200,000

July 1 Bonus issue 200,000

Total ordinary shares 400,000

Basic earnings per share (12,000,000/400,000) 30

Problem 31-8 (Application Guidance PAS 33)

On January 1, 2018, Gina Company had 300,000 ordinary shares outstanding, P100 par or a total par value of
P30,000,000.

During 2018, the entity issued rights to acquire one ordinary share at P100 in the ratio of one share for every 5
shares held.

The rights are exercised on March 31, 2018. The market value of each ordinary share immediately prior to march
31, 2018 was P160. The net income for 2018 was P6,000,000.

What amount should be reported as basic earnings per share?

a. 17.14
b. 16.67
c. 18.75
d. 17.39

Solution 31-8 Answer a

Theoretical value of right

Market value of share right -on minus subscription price

= Value of one right

Number of rights to purchase one share plus 1

Applying the formula, the theoretical value of one right is:

160-100 60
= = P10 per right
5+1 6

Market value of share right-on 160

Theoretical value of right 10

Market value of share ex-right 150

Adjustment factor 160/150

The number of ordinary shares outstanding prior to the exercise of the rights is multiplied by an adjustment factor
whose numerator is the market value of the share right-on and whose denominator is the market value of the share
ex-right.

Ordinary shares on January 1 300,000

Ordinary shares issued through exercise of rights on March 31(300,000/5) 60,000

Total ordinary shares on March 31 360,000

January 1 300,000 x 160/150 x 3/12 80,000

March 31 360, 000 x 9/12 270,000

Average number of shares 350,000

Basic earnings per share (6,000,000/350,000) 17.34

Problem 31-9 (Application Guidance PAS 33)

Excel Company had 600,000 ordinary shares outstanding on January 1, 2018. During 2018, the entity issued rights
to acquire one ordinary share at P10 in the ratio of one new share for every 4 shares outstanding.

The market value of the ordinary share immediately prior to the rights issue is P35. The rights were exercised on
October 1, 2018.

The net income for the year is P8,550,000.

What amount should be reported as basic earnings per share?

a. 11.40
b. 12.00
c. 14.25
d. 13.41

Solution 31-9 Answer b

35-10
Theoretical value of right =
4+1

= 5

Market value of share right-on 35

Theoretical value of right 5

Market value of share ex-right 30

Adjustment factor 35/30

Ordinary shares on January 1 600,000

Ordinary shares issued through exercise of rights on October 1(600,000/4) 150,000

Total ordinary shares – October 1 750,000

January 1 600,000 x 35/30 x 9/12 525,000

October 1 750, 000 x 3/12 187,500

Average number of ordinary shares 712,500

Basic earnings per share (8,550,000/712,500) 12.00

Problem 31-10 (IAA)

During the current year, Innova Company had outstanding 200,000 ordinary shares and 20,000 cumulative
preference shares with a P10 per share dividend. Each preference share is convertible into five ordinary shares.

The entity had a P3,000,000 net loss for the year. No dividends were paid or declared.

What amount should be reported as basic loss per share?

a. 15.00
b. 16.00
c. 10.00
d. 10.67

Solution 31-10 Answer b

Net loss 3,000,000

Preference dividend (20,000 x 10) 200,000

Total loss to ordinary shares 3,200,000

Basic loss per share (3,200,000/200,000) 16.00

The annual preference dividend is added to the net loss to get the total loss attribute to the ordinary shares
QUESTION 60-11 Multiple choice (PAS 33)

1. EPS disclosures are required for

a. Entities whose ordinary shares and potential ordinary shares are publicly traded.
b. Entities that are in the process of issuing ordinary shares in the public market.
c. All entities.
d. Entities whose ordinary shares and potential ordinary shares are publicly traded and entities
that are in the process of issuing ordinary shares in the public market.
2. EPS disclosures are
a. Required for all public and nonpublic entities
b. Required for public entities and encouraged for nonpublic entities
c. Encouraged for public entities and required for nonpublic entities
d. Encouraged for all entities
3. When an entity issues both consolidated and separate financial statements, the EPS information is required
a. For both sets of financial statements
b. In neither set of financial statements
c. Only for consolidated financial statements
d. Only for separate financial statements
4. Earnings per share shall be computed on the basis of
a. The number of shares outstanding at the end of the year
b. A weighted average of the number of shares outstanding during the year regardless of the extent of
fluctuations
c. A weighted average of the number of shares outstanding during the year except that minor
fluctuations in the number of shares may be disregarded
d. The number of shares outstanding at the middle of year
5. Earnings per share shall be reported for all of the following, except
a. Continuing operations
b. Discontinued operations
c. Net income
d. Net cash provided by operating activities
6. In computing basic earnings per share, if the preference shares cumulative, the amount that should be
deducted as an adjustment to the numerator is the
a. Preference dividends in arrears
b. Preference dividends paid during the year
c. Annual preference dividend
d. Annual ordinary dividend
7. In computing basic earnings per share, the amount of preference dividends on noncumulative preference
shares should be
a. Deducted from net income whether declared or not
b. Deducted from net income only when declared
c. Added to net income only when declared
d. Ignored
8. In computing basic earnings per share, the full amount of the required preference dividends on
cumulative preference shares for the period should be
a. Ignored
b. Deducted from net income only when declared
c. Deducted from net income whether declared or not
d. Added to net income whether declared or not
9. In computing basic loss per share, the annual preference dividend on cumulative preference shares should
be
a. Ignored
b. Deducted from net loss whether declared or not
 c. Added to the net loss whether declared or not
d. Added to the net loss only when declared

QUESTION 60-12 Multiple choice (IFRS)

1. Earnings per share shall be calculated before accounting for which of the following?
a. Preference dividend for the period
b. Ordinary dividend
c. Taxation
d. Minority interest
2. If a bonus occurs between the year-end and the date that the financial statements are authorized for issue
a. The EPS for both the current and the previous year is adjusted
b. The EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted
3. If a new issue of shares for cash is made between the year-end and the date that the financial statements are
authorized for issue
a. The EPS for both the current and the previous year is adjusted
b. The EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted
4. The weighted average number of shares outstanding during the period for all periods other than the
conversion of potential ordinary shares should be adjusted for
a. Any change in the number of ordinary shares without a change in resources
b. Any prior period adjustment
c. Any new issue of shares for cash
d. Any convertible instruments settled in cash
5. Which figure for earnings does EPS information use?
a. Profit attributable to ordinary equity holder and preference shareholders of the parent
b. Profit before taxation
c. Profit from operations
d. Profit attributable to ordinary equity holders of the parent

6. Ordinary shares issued as part of a business combination are included in the EPS calculation from
a. The beginning of the accounting period.
b. The date of acquisition
c. The end of the accounting period.
d. The midpoint of the accounting year.
7. Shares which are issued to settle a liability are included in the EPS calculation from
a. Date of the contract for services
b. Halfway through the rendering of services
c. The completion of services
d. The settlement date
8. Shares which are to be issued upon the conversion of a mandatorily convertible instrument upon the
conversion of a mandatorily convertible instrument are included in the calculation of basic earnings per
share from
a. The date of the contract for the shares
b. Halfway through the period
c. The date of conversion
d. The issue of the share certificate
9. Under IFRS, where ordinary shares are issued but not fully paid, the ordinary shares are treated in the
calculation of basic EPS
 a. In the same way as fully paid ordinary shares.
b. As a fraction of an ordinary share to the extent that the shares are entitled to participate in
dividends.
c. In the same way as warrants or options and are included only in diluted EPS.
d. Are ignored.

QUESTION 60-13 Multiple Choice (IAA)

1. Where in the financial statements should basic and diluted EPS be reported?
a. In the accompanying notes
b. In management discussion and analysis
c. In the income statement
d. In the statement of cash flows
2. An entity that reports a discontinued operation shall present basic and diluted earnings per share for the
discontinued operation
a. Only on the face of the income statement.
b. Only in the notes to the financial statements.
c. Either on the face of the income statement or in the notes to financial statements.
d. Only if the management chooses to do so.
3. What is the correct treatment of a share dividend issued in mid-year when computing the weighted average
number of ordinary shares outstanding for earnings per share purposes?
a. The share dividend should be weighted by the length of time that the additional shares are
outstanding during the period.
b. The share dividend should be included in the weighted average number of shares outstanding only if
the additional shares result in a decrease of three percent or more in earnings per share.
c. The share dividend should be weighted as if the additional shares were issued at the beginning
of the year.
d. The share dividend should be ignored since no additional capital was received.
4. In the computation of weighted average number of shares outstanding when there is a share split, the
additional shares are
a. Weighted by the number of days outstanding.
b. Weighted by the number of months outstanding.
c. Considered outstanding at the beginning of the year
d. Considered outstanding at the beginning of the earliest year reported
5. Earnings per share should be computed on the basis of
a. Preference shares
b. Voting ordinary share
c. Voting and nonvoting ordinary shares
d. Voting ordinary share and participating preference shares
6. Undeclared preference dividends are deducted from net income in the earnings per share computation for
which type of preference shares?
a. Noncumulative
b. Cumulative
c. Neither cumulative nor noncumulative
d. Both cumulative and noncumulative
7. Earnings per share should always be reported for
a. Gross profit
b. Income before tax
c. Income from continuing operations
d. Prior period error

CHAPTER 32
BASIC EARNINGS PER SHARE
Average Shares

Problem 32-1 (AICPA Adapted)

Jet Company provided the following information for the current year:

January 1 Shares outstanding 200,000

April 1 2-for-1 share split 200,000
July 1 Shares issued 100,000

What is the average number of shares?

a. 400,000
b. 450,000
c. 500,000
d. 540,000

Solution 32-1 Answer b

January 1 (200,000 x 2 x 12/12) 400,000

July 1 (100,000 x 6/12) 50,000
450,000

The share split is recognized retroactively, meaning, it is treated as a change from the date the original shares are
issued.

Thus, the balance of 200,000 shares on January 1 would become 400,000 as a result of a 2-for-1 share split.

Problem 32-2 (AICPA Adapted)

Timp Company had the following transactions during the year:

January 1 Ordinary shares outstanding 300,000

February 1 Issued a 10% share dividend 30,000
March 1 Issued ordinary shares in a business combination 90,000
July 1 Issued ordinary shares for cash 80,000
December 31 Ordinary shares outstanding 500,000

What is the weighted average number of shares outstanding?

a. 400,000
b. 442,500
c. 445,000
d. 460,000

Solution 32-2 Answer c

January 1 300,000 x 1.10 x 12/12 330,000

March 1 90,000 x 10/12 75,000
July 1 80,000 x 6/12 40,000
Average number of shares 445,000
The share dividend is treated as a change from the date the original shares are issued. Thus, the balance of 300,000
on January 1 would become 330,000 shares.
Problem 32-3 (IAA)
Sharon Company provided the following information in relation to share capital for the current year:

January 1 Shares outstanding 1250,000

April 1 Shares issued 200,000
October 1 Treasury shares purchased 100,000
December 1 Issued a 100% share dividend

What is the number of weighted average shares?

a. 2,700,000
b. 2,775,000
c. 2,750,000
d. 1,350,000

Solution 32-3 Answer c

January 1 (1,250,000 x 200%) 2,500,000

April 1 (200,000 x 200% x 9/12) 300,000
October 1 (100,000 x 200% x 3/12) (50,000)
Average shares 2,750,000

Problem 32-4 (IAA)

At the beginning of current year, Nissan Company had 100,000 ordinary shares outstanding. During the current
year, the following events occurred:

March 1 2-for-1 share split

June 1 Issued 30,000 additional shares
September 1 20% share dividend

What is the weighted average number of shares outstanding?

a. 276,000
b. 261,000
c. 230,000
d. 256,000

Solution 32-4 Answer b

January 1 (100,000 x 2 x 1.20 x 12/12) 240,000

June 1 (30,000 x 1.20 x 7/12) 21,000
Average number of shares 261,000

Problem 32-5
Shane Company had 100,000 ordinary shares issued and outstanding at the beginning of current year.

During the current year, the entity had the following ordinary share transactions:

April 1 Issued 30,000 previously unissued shares

May 1 Split the share 2 for 1
June 30 Purchased 10,000 shares for the treasury
July 31 Distributed a 20% share dividend
December 31 Split the share 3 for 1

What is the weighted average number of shares that should be used in calculating earnings per share?
a. 288,000
b. 864,000
c. 882,000
d. 972,000

Solution 32-5 Answer b

January 1 (100,000 x 2 x 1.20 x 3 x 12/12) 720,000

April 1 (30,000 x 2 x 1.20 x 3 x 9/12) 162,000
June 30 (10,000 x 1.20 x 3 x 612) (18,000)
864,000

The January 1 balance is adjusted for the 2 for 1 split, 20% share dividend and 3 for 1 split.

The April 1 issue is adjusted for the 2 for 1 split, 20% share dividend and 3 for 1 split.

The June 30 treasury shares are adjusted for the 20% share dividend and 3 for 1 split.

Problem 32-6 (IAA)

Helen Company provided the following share transactions for the current year:

January 1 Shares outstanding 44,000

February 1 Issued for cash 56,000
May 1 Acquired treasury shares 25,000
August 1 25% share dividend
September 1 Resold treasury shares 10,000
November 1 Issued 3 for 1 share split

What is the weighted average number of shares for EPS computation?

a. 305,000
b. 307,500
c. 103,750
d. 311,250

Solution 32-6 Answer a

January 1 (44,000 x 1.25 x 3 x 12/12) 165,000

February 1 (56,000 x 1.25 x 3 x 11/12) 192,500
May 1 (25,000 x 1.25 x 3 x 8/12) (62,500)
September 1 (10,000 x 3 x 4/12) 10,000
305,000

The January 1 balance is adjusted for the 25% share dividend and 3 for 1 split.

The February 1 issue is adjusted for the 25% share dividend and 3 for 1 split.

The May 1 treasury shares are adjusted for the 25% share dividend and 3 for 1 split.
The September 1 resale of treasury is adjusted for the 3 for 1 split.

Problem 32-7 (IAA)

Wisconsin Company had 250,000 ordinary shares outstanding on January 1, 2018.

During 2018 and 2019, the following transactions took place:

2018:
March 1 Sold 24,000 shares
July 1 Issued a 20% shares dividend
October 1 Sold 16,000 shares
December 1 Purchased 15,000 shares to be held in treasury

2019:
June 1 3 for 1 share split
September 1 Sold 60,000 shares

1. What is the weighted average number of shares for 2018 to be used in the earnings per share computation
for comparative financial statements of 2019?
a. 980,250
b. 329,800
c. 984,000
d. 969,000

2. What is the weighted number of shares for 2019 to be used in the earnings per share computation for
comparative financial statements of 2019?
a. 1,009,400
b. 1,049,400
c. 1,169,400
d. 989,400

Solution 32-7

Question 1 Answer a

2018
January 1 (250,000 x 1.20 x 3 x 12/12) 900,000
March 1 (24,000 x 1.20 x 3 x 10/12) 72,000
October 1 (16,000 x 3 x 3/12) 12,000
December 1 (15,000 x 3 x 1/12) (3,750)
980,250

January 1, 2018 250,000

March 1, 2018 24,000
July 1, 2018 54,800
October 1, 2018 16,000
December 1, 2018 (15,000)
Outstanding shares – December 31, 2018 329,800
Solution 2 Answer a

2019
January 1 (329,800 x 3 x 12/12) 989,400
September 1 (60,000 x 4/12) 20,000
1,009,400

Problem 32-8 (IFRS)

Precise Company had a net income of p15,000,000 for the current year. The following appropriation have not been
considered in this amount:

Arrears of cumulative preference dividend for 2 years 4,000,000

Ordinary dividends 5,000,000
Preference share premium payable on redemption 1,000,000
Exceptional profit, net of tax 4,000,000

The entity had 3,000,000 ordinary shares of P1 par value outstanding at the beginning of the year. The following
share transactions occurred during the current year:

January 1 Issued at P5 per share, P1 paid to date and entitled to participate

in dividends to the extent paid up 250,000
April 1 Full market price P3 per share issue 600,000
July 1 Purchase of own shares 400,000

What amount should be reported as basic earnings per share?

a. 4.85
b. 4.57
c. 3.64
d. 3.94

Solution 32-8 Answer a

Net income per book 15,000,000

Exceptional profit 4,000,000
Adjusted net income 19,000,000
Preference dividend for current year (4,000,000/2) (2,000,000)
Preference share premium payable upon redemption (1,000,000)
Net income to ordinary shares 16,000,000

The preference share premium payable on redemption can be considered as dividend on participating preference
share.

January 1 (3,000,000 x 12/12) 3,000,000

January 1 (250,000 x 1/5 x 12/12) 50,000
April 1 (600,000 x 9/12) 450,000
July 1 (400,000 x 6/12) (200,000)
Average shares 3,300,000

Basic earnings per share

(16,000,000/3,300,000) 4.85
Problem 32-9 (AICPA adapted)
Strauch Company had one class of ordinary share capital outstanding and no other securities that are potentially
convertible into ordinary shares. During 2018, 100,000 shares were outstanding.

In 2019, two distributions of additional ordinary share occurred:

April 1 – 20,000 treasury shares were sold.

July 1 – A 2-for-1 share split was issued.

The net income for 2019 was P4,100,000 and the net income for 2018 was P3,500,000.

1. What amount should be reported as basic earnings per share for 2019 in the comparative income statement
for 2019?

a. 20.50
b. 17.83
c. 23.43
d. 17.08

2. What amount should be reported as basic earnings per share for 2018 in the comparative income statement
for 2019?

a. 35.00
b. 17.50
c. 15.22
d. 14.58

Solution:
Question 1 Answer B

January 1, 2019 (200,000 x 12/12) 200,000

April 1, 2019 (20,000 x 2x9/12) 30,000
Average number of shares 230,000

2019 basic ESP (4,100,000/230,000) 17.83

Question 2 Answer B

December 31, 2018 – balance 100,000

July 1, 2019 – 2-for-1 share split 100,000
Total ordinary shares – Dec. 31, 2018 200,000

2018 basic ESP (3,500,000/200,000) 17.50

Problem 32-10 (IAA)
On January 1, 2018, Shane Company had 100,000 ordinary shares outstanding. The following transactions occurred
during 2018:

Mar. 1 reacquired 3,000 shares accounted for as treasury

Sept. 1 sold all treasury shares
Dec. 1 sold 66,000 new shares for cash
Dec. 31 reported a net income of P2,600,000.

The following transaction occurred during 2019:

Jan. 15 declared and issued a 25% share dividend

Dec. 31 reported a net income of P4,000,000

1. What amount should be reported as basic earnings per share for 2018 for presentation in comparative
financial statements on December 31, 2019?

a. 15.88
b. 20.00
c. 20.80
d. 19.90

2. What amount should be reported as basic earnings per share for 2019 for presentation in comparative
financial statements on December 31, 2019?

a. 24.10
b. 19.28
c. 30.77
d. 32.00

Solution
Question 1 Answer B
2018

Jan. 1 (100,000 x 1.25 x 12/12) 125,000

Mar. 1 (3,000 x 1.25 x 10/12) (3,125)
Sept. 1 (3,000 x 1.25 x 4/12) 1,250
Dec. 1 (66,000 x 1.25 x 1/12) 6,875
Average shares outstanding 130,000

Basic EPS for 2018 (2,600,000/130,000) 20.00

Question 2 Answer B

2018
Jan. 1 Outstanding 100,000
Mar. 1 treasury shares purchased (3,000)
Sept. 1 Resale of treasury shares 3,000
Dec. 1 new issue 66,000
Outstanding shares – December 31, 2018 166,000
Average shares outstanding for 2019 (166,000x1.25) 207,500

Basic EPS for 2019 (4,000,000/207,500) 19.28

QUESTIONS:

Question 60-1

What is the meaning of earnings per share?

Answer:

The term Earnings per share means the amount expected to be received by a shareholder each year as a
return on investment.

It is the amount if income attributable to each ordinary share. Thus, the EPS information pertains only to ordinary
share. It is not necessary for preference share because there is a definite rate of return if such share.

The presentation of EPS is required for entities whose ordinary shares or potential ordinary shares are publicly
traded and for entities that are in the process of issuing ordinary shares or potential ordinary shares in the public
securities market.

An entity shall present on the face of the income statement basic and diluted earnings per share for incoe or loss
from continuing operations.

As entity that reports a discontinued operation shall disclose the basic and diluted amounts per share for the
discontinued operation either on the face of the income statement of in the notes to the statements.

When an entity presents both consolidated financial statements and separate financial statements, the disclosures
require need be presented only on the basis of the consolidated information.

Question 60-2

What is the formula for computing basic earnings per share?

Answer

Net income/Ordinary shares outstanding

The earnings should be the net income after deducting the annual preference dividend

The annual cumulative preference dividend is deducted form net income, whether such dividend is declared or not,
while noncumulative preference dividend is deducted from net income only when declared.

The ordinary shares outstanding should be the weighted average ordinary shares outstanding.
Question 60-3

Explain the treatment of “subscribed ordinary shares” in computing EPS

Answer

Under Application Guidance 15 of IFRS 33, subscribed ordinary shares or partly paid ordinary shares are included
in EPS to the extend that they are entitled to participate in dividends.

Under the Philippine Corporation Code, subscribed shares are entitled to participate fully in dividends.

Thus, the full subscribed shares are included in EPS computation under Philippine Jurisdiction.

Question 60-4

Define a potential ordinary share.

Answer

A Potential ordinary share is a financial instrument or other contract that may entitle the holder to ordinary
shares.

In other words, a potential ordinary share is a financial instrument that represents future issuance of ordinary
shares.

Major types of potential ordinary shares:

a. Convertible bond payable
b. Convertible preference share
c. Share option and warrant

Question 60-5

Explain dilution and antidilution.

Answer

Dilution arises when the inclusion of the potential ordinary shares decreases the basic earnings per share or
increases the basic loss per share.

In this case, the potential shares are dilutive securities.

On the other hand, antidilution arises when the inclusion of the potential ordinary shares increases basic
earning per share or decreases basic loss per share

In this case, the potential ordinary shares are considered as antidilutive and therefore ignored in computing diluted
earnings per share
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ACCTG26 PRELIM PRETEST 1

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Brock Company reported operating expenses in two categories, namely distribution and general and
administrative.

The adjusted trial balance at year-end included the following expense and loss accounts for current year:
Accounting and legal fees 1,200,000
Advertising 1,500,000
Freight out 800,000
Interest 700,000
Loss on sale of long-term investment 300,000
Officers’ salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000

One-half of the rented premises is occpied by the sales department.

What amount should be reported as total distribution costs?

a. 4,800,000 c. 3,700,000
b. 4,000,000 d. 3,600,000
____ 2. Lee Company reported the following data for the current year:
Legal and audit fees 1,700,000
Rent for office space 2,400,000
Interest on inventory loan 2,100,000
Loss on abandoned data processing equipmetn 350,000

The office space is used equally by the sales and accounting departments.

What amount should be classified as general and administrative expenses?

a. 2,900,000 c. 4,100,000
b. 3,250,000 d. 5,000,000
____ 3. Griff Company reported the following data for the current year:
Accounting and legal fees 250,000
Freight in 1,750,000
Freight out 1,600,000
Officers’ salaries 1,500,000
Insurance 850,000
Sales representative salaries 2,150,000
Research and development expense 1,000,000

What amount should be reported as administrative expense?

a. 2,600,000 c. 4,350,000
b. 5,500,000 d. 3,600,000
____ 4. Dell Company provided the following information for the current year:
Purchases 5,300,000

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 lOMoARcPSD|5049905

Purchase discounts 100,000

Beginnings inventory 1,600,000
Ending inventory 2,150,000
Freight out 400,000

What is the cost of goods sold for the current year?

a. 4,650,000 c. 5,050,000
b. 4,750,000 d. 5,850,000
____ 5. Bart Company provided the following information for the current year:
Disbursements for purchases 5,800,000
Increase in tradde accounts payable 500,000
Decrease in merchandise inventory 200,000

What is the cost of goods sold for the current year?

a. 6,500,000 c. 5,500,000
b. 6,100,000 d. 5,100,000
____ 6. Hihligaynon Company provided the following information for the current year:
Beginning inventory 400,000
Freight in 300,000
Purchse returns 900,000
Ending iventory 500,000
Selling expenses 1,250,000
Sales discount 250,000

The cost of goods sold is six times the selling expenses.

hat is the amount of gross purchased?

a. 6,500,000 c. 8,000,000
b. 6,700,000 d. 8,200,000
____ 7. Bicolano Company provided the following data for the current year:
Iventory, January 1 2,000,000
Purchases 7,500,000
Purchase returms and allowance 500,000
Sales eturns and allowances 750,000
Inventory on December 31 2,800,000
Gross profit rate on net sales 20%

What is the amount of gross sales for the current year?

a. 7,750,000 c. 7,000,000
b. 8,500,000 d. 9,125,000
____ 8. Carmela Company provided the following information for the current year:
Net sales 1,800,000
Freight in 45,000
Purchsse discounts 25,000
Ending inventory 120,000
Gross margin on sales 20%

What i the of cost of goods available for sale?

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 lOMoARcPSD|5049905

a. 1,200,000 c. 1,080,000
b. 1,220,000 d. 960,000
____ 9. Jericho Company showed net income of P480,000 for the year. Selling expenses were equal to 15% of sales
and also 25% of cost of goods sold. All other expenses were 13% of sales.

What is the gros profit for the year?

a. 4,000,000 c. 1,600,000
b. 2,400,000 d. 2,000,000
____ 10. Pearl Company erported income before tax of P5,000,000 for the current year. The auditor questioned the
folowing amount that had been included in income before tax:

Equity in earnings of Cinn Company - 40% interest 1,600,000

Dividend received fron Cinn Compant 320,000
Adjustment of profit of prior year
for arithmetical error in depreciation (1,400,000)
Unrealized gain on equity investment at FVOVI 1,000,000

What amount should be reported a adjusted net income?

a. 3,400,000 c. 5,080,000
b. 4,680,000 d. 6,080,000

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Chapter 4
STATEMENT OF COMPREHENSIVE INCOME
Cost of goods sold and operating expenses

Problem 4-1 (AICPA Adapted)

Brock Company reported operating expenses in two categories, namely distribution and general and
administrative.

The adjusted trial balance at year-end included the following expense and loss accounts for current year:

Accounting and legal fees 1,200,000

Advertising 1,500,000
Freight out 800,000
Interest 700,000
Loss on sale of long-term investment 300,000
Officers’ salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000

One-half of the rented premises is occupied by the sales department.

What amount should be reported as total distribution costs?

a. 4,800,000
b. 4,000,000
c. 3,700,000
d. 3,600,000

Solution 4-1 Answer a

Advertising 1,500,000
Freight out 800,000
Rent (2,200,000 x 1/2) 1,100,000
Sales salaries and commissions 1,400,000
Total distribution costs 4,800,000
Problem 4-2 (AICPA Adapted)

Lee Company reported the following data for the current year:

Legal and audit fees 1,700,000

Rent for office space 2,400,000
Interest on inventory loan 2,100,000
Loss on abandoned data processing equipment 350,000
Freight in 1,750,000
Freight out 1,600,000
Officers’ salaries 1,500,000
Insurance 850,000
Sales representative salaries 2,150,000
Research and development expense 1,000,000

The office space is used equally by the sales and accounting departments.

What amount should be classified as general and administrative expenses?

a. 5,250,000
b. 6,450,000
c. 5,600,000
d. 6,250,000

Solution 4-2 Answer a

Legal and audit fees 1,700,000

Rent for office space (2,400,000 x 1/2) 1,200,000
Officers’ salaries 1,500,000
Insurance 850,000
Total general and administrative expenses 5,250,000

Problem 4-3 (AICPA Adapted)

Vigor Company provided the following information for the current year:

Net accounts receivable at January 1 900,000

Net accounts receivable at December 31 1,000,000
Account receivable turnover 5 to 1
Inventory at January 1 1,100,000
Inventory at December 31 1,200,000
Inventory turnover 4 to 1

What is the gross margin for the current year?

a. 150,000
b. 200,000
c. 300,000
d. 400,000
Solution 4-3 Answer a

Net Sales =Average accounts receivable x accounts receivable turnover

=950,000 x 5
=4,750,000

Cost of sales =Average inventory x iventory turnover

= 1,150,000 x 4
=4,600,000

Gross margin = 4,750,000 – 4,600,000

=150,000

Problem 4-4 (PHILCPA Adapted)

Hiligaynon Company provided the following information for the current year:

Beginning inventory 400,000

Freight in 300,000
Purchase returns 900,000
Ending inventory 500,000
Selling expenses 1,250,000
Sales discount 250,000

The cost of goods sold is six times the selling expenses.

What is the amount of gross purchases?

a. 6,500,000
b. 6,700,000
c. 8,000,000
d. 8,200,000

Solution 4-4 Answer d

Beginning inventory 400,000

Gross purchases (SQUEEZE) 8,200,000
Freight in 300,000
Purchase returns (900,000)
Goods available for sale 8,000,000
Ending inventory (500,000)
Cost of goods sold (1,250,000 x 6) 7,500,000
Problem 4-5 (PHILCPA Adapted)
Bicolano Company provided the following data for the current year:

Inventory, January 1 2,000,000

Purchases 7,500,000
Purchase returns and allowances 500,000
Sales returns and allowances 750,000
Inventory on December 31 2,800,000
Gross profit rate on net sales 20%

What is the amount of gross sales for the current year?

a. 7,750,000
b. 8,500,000
c. 7,000,000
d. 9,125,000

Solution 4-5 Answer b

Inventory – January 1 2,000,000

Purchases 7,500,000
Purchase returns and allowances ( 500,000)
Goods available for sale 9,000,000
Inventory - December 31 (2,800,000)
Cost of goods sold 6,200,000

Net sales (6,200,000 / 80%) 7,750,000

Sales returns and allowances 750,000
Gross Sales 8,500,000

Problem 4-7 (AICPA Adapted)

Carmela Company provided the following information for the current year:

Net Sales 1,800,000

Ending inventory 120,000
Gross margin on sales 40%

What is the cost of goods available for sale?

a. 1,200,000
b. 1,220,000
c. 1,080,000
d. 960,000

Solution 4-6 Answer a

(1,800,000 x 60% = 1,080,000 + 120,000) 1,200,000

Problem 4-7 (AICPA Adapted)

Kay Company provided the following information for the current year:

Increase in raw materials inventory 150,000

Decrease in goods in process inventory 200,000
Decrease in finished goods inventory 350,000
Raw materials purchased 4,300,000
Direct labor payroll 2,000,000
Factory overhead 3,000,000
Freight out 450,000
Freight in 250,000

What is the cost of goods sold for he current year?

a. 9,950,000
b. 9,550,000
c. 9,250,000
d. 9,150,000

Solution 4-7 Answer a

Raw materials purchased 4,300,000

Freight in 250,000
Increase in raw materials (150,000)
Raw materials used 4,400,000
Direct labor 2,000,000
Factory overhead 3,000,000
Total manufacturing cost 9,400,000
Decrease in goods in process 200,000
Cost of goods manufactured 9,600,000
Decrease in finished goods 350,000
Cost of goods sold 9,950,000
Problem 4-8 (IAA)
Sheraton Company reported the following information for the current year.

Ending goods in process 1,000,000

Depreciation on factory building 320,000
Beginning raw materials 400,000
Direct labor 1,980,000
Factory supervisor's salary 560,000
Depreciation on headquarters building 210,000
Beginning goods in process 760,000
Ending raw materials 340,000
Indirect labor 360,000
Purchases of raw materials 2,300,000

What is the cost of goods manufactured for the current year?

a. 5,340,000
b. 5,580,000
c. 5,550,000
d. 5,820,000

Solution 4-8 Answer a

Beginning raw materials 400,000
Purchases of raw materials 2,300,000
Raw materials available for use 2,700,000
Ending raw materials ( 340,000)
Raw materials used 2,360,000
Direct labor 1.980,000
Factory overhead:
Depreciation on factory building 320,000
Factory supervisor's salary 560,000
Indirect labor 360,000 1,240,000
Total manufacturing cost 5,580,000
Beginning goods in process 760,000
Total goods in process 6,340,000
Ending goods in process (1 ,000,000)
Cost of goods manufactured 5,340,000
Problem 4-9 (PHILCPA Adapted)

Argentina Company incurred the following costs and expenses during the current year:

Raw material purchases 4,000,000

Direct labor 1,500,000
Indirect labor — factory 800,000
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation — factory building 300,000
Taxes on salesroom and general office 150,000
Depreciation — sales equipment 50,000
Advertising 400,000
Sales salaries 500,000
Office salaries 700,000
Utilities — 60% applicable to factory 500,000

Beginning Ending
Raw materials 300,000 450,000
Work in process 400,000 350,000
Finished goods 500,000 700,000

1. What is the cost of raw materials used?

a. 3,850,000
b. 4,000,000
c. 4,150,000
d. 4,750,000

2. What is the cost of goods manufactured for the current year?

a. 7,450,000
b. 7,200,000
c. 7,100,000
d. 7,300,000

3. What is the cost of goods sold for the current year?

a. 7,300,000
b. 6,900,000
c. 7,600,000
d. 8,300,000

Solution 4-9
Question I Answer a

Beginning raw materials 300,000

Raw material purchases 4,000,000
Raw materials available for use 4,300,000
Ending raw materials ( 450,000)
Raw materials used 3,850,000
Question 2 Answer c
Raw materials used 3,850,000
Direct labor 1,500,000

Factory overhead:
Indirect labor 800,000
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation — factory building 300,000
Utilities (60% x 500,000) 300,000 1,700,000

Total manufacturing cost 7,050,000

Beginning work in process 400,000
Ending work in process ( 350,000)
Cost of goods manufactured 7,100,000

Question 3 Answer b
Beginning finished goods 500,000
Cost of goods manufactured 7,100,000
Goods available for sale 7,600,000
Ending finished goods ( 700,000)
Cost of goods sold 6,900,000

Problem 4-10 (PHILCPA Adapted)

Mercury Company showed cost of goods sold of P4,320,000 in the statement of comprehensive income after
the first year of operations.

The total manufacturing cost comprised the following:

Materials used 50%
Direct labor Incurred 30%
Manufacturing overhead 20%

Goods in process at year-end amounted to 10% of the total manufacturing cost.

Finished goods at year-end amounted to 20% of the cost of goods manufactured.

What is the amount of the direct labor cost incurred?

a. 1,800,000
b. 2,400,000
c. 3,000,000
d. 5,400,000

Solution 4-10 Answer a

Total manufacturing cost 100% 6,000,000
Less: Goods in process — 12/31 10% 600,000
Cost of goods manufactured 90% 5,400,000
Less: Finished goods — 12/31 (20% x 90%) 18% 1,080,000
Cost of goods sold 72% 4,320,000
Total manufacturing cost (4,320,000 / 72%) 6,000,000
Direct labor cost (30% x 6,000,000) 1,800,000
Problem 4-11 (IAA)

Tactful Company reported that the operating expenses other than interest expense for the year amount to
40% of cost of goods sold but only 20% of sales. Interest expense is 5% of sales.

The amount of purchases is 120% of cost of goods sold. Ending inventory is twice as much as the beginning
inventory. The net income for the year P560,000. The income tax rate is 30%.

What is the amount of sales for the year?

a. 2,080,000
b. 1,485,000
c. 2,285,000
d. 3,200,000

Solution 4-11 Answer d

Income before income tax (560,000 / 70%) 800,000
Sales (800,000 / 25%) 3,200,000

Sales 100%
Cost of goods sold (20% / 40%) ( 50%)
Operating expenses ( 20%)
Interest expense ( 5%)
Income before income tax 25%

Problem 4-12 (PHILCPA Adapted)

Jericho Company showed net income of P480,000 for the year. Selling expenses were equal to 15% of sales
and also 25% of cost of goods so All other expenses were 13% of sales.

What is the gross profit for the year?

a. 4,000,000
b. 2,400,000
c. 1,600,000
d. 2,000,000

Solution 4-12 Answer c

Sales 100%
Cost of goods sold ( 15% / 25%) (60%)
Selling expenses (15%)
Other expenses (13%)
Net income 12%

Sales ( 480,000 / 12%) 4,000,000

Cost of goods sold (60% x 4,000,000) 2,400,000
Gross profit 1,600,000
Problem 4-13 (PHILCPA Adapted)

Ronalyn Company reported that the financial records were destroyed by fire at the end of the current year.

However, certain statistical data related to the income statement are available.

Interest expense 20,000

Cost of goods sold 2,000,000
Sales discount 100,000

The beginning inventory was P400,000 and decreased 20% during the year.

Administrative expenses are 25% of cost of goods sold but only 10% of gross sales.

Four-fifths of the operating expenses relate to sale activities.

1. What is the amount of gross sales?

a. 5,000,000
b. 7,000,000
c. 3,000,000
d. 4,000,000

2. What is the total amount of operating expenses?

a. 2,000,000
b. 2,500,000
c. 1,500,000
d. 2,520,000

3. What is the income before tax for the current year?

a. 380,000
b. 480,000
c. 330,000
d. 400,000

Solution 4-13

Question 1 Answer a

Cost of goods sold (10% / 25%) 40%

Cost of goods sold 2,000,000

Divide by cost ratio 40%
Gross sales 5,000,000
Question 2 Answer b

Administrative expenses (10% x 5,000,000) 500,000

Operating expenses ( 500,000 / 1/5) 2,500,000

Administrative expenses ( 500,000)
Distribution costs 2,000,000

Question 3 Answer a

Sales 5,000,000
Sales discount ( 100,000)
Net sales 4,900,000
Cost of goods sold (2,000,000)
Gross profit 2,900,000
Administrative expenses ( 500,000)
Distribution costs (2,000,000)
Interest expense ( 20,000 )
Income before income tax 380,000