CHAPTER 20: DILUTED EARNINGS PER SHARE

Problem 20-1
Required:
1. Basic earnings per share

Net Income P 1,730,000

Divide by ordinary shares actually outstanding 50,000
Basic earnings per share P 34.60

2. Diluted earnings per share

Net Income P 1,730,000

Add: Interest expense on bonds payable 100,000
(10% x 1,000,000)
Income tax (30% x 100,000) (30,000) 70,000
Adjusted net income 1,800,000

Ordinary shares actually outstanding 50,000

Assumed issued ordinary shares through 10,000
conversion of bonds payable
(1,000,000/1000 x 10)
Total ordinary shares 60,000

Diluted earnings per share (1,800,000/60,000) P 30

Problem 20-2
Required:
1. Basic earnings per share

Net Income P 2,749,000

Divide by ordinary shares actually outstanding 100,000
Basic earnings per share P 27.49

2. Diluted earnings per share

Net Income P 2,749,000

Add: Interest expense on bonds payable 180,000
(12% x 2,000,000 x 9/12)
Income tax (30% x 180,000) (54,000) 126,000
Adjusted net income 2,875,000

Ordinary shares actually outstanding 100,000

Assumed issued ordinary shares through 15,000
conversion of bonds payable
(2,000,000/1,000 x 10) x 9/12
Total ordinary shares 115,000

Diluted earnings per share (2,875,000/115,000) P 25

Problem 20-3
Required:
1. Basic earnings per share

January 1, Outstanding 100,000

 April 1, Conversion (3,000,000/1,000 x 20 x 9/12) 45,000
Average ordinary shares 145,000

Basic earnings per share (2,320,000/145,000) P 16

2. Diluted earnings per share

January 1, Outstanding 100,000

April 1, Conversion (4,000 x 20) 80,000
Total ordinary shares 180,000

Net Income P 2,320,000

Add: Interest on bonds 210,000
(3,000,000 x 12% x 3/12) +
(1,000,000 x 12% )
Income Tax (30% x 210,000) (63,000) 147,000
Adjusted net income 2,467,000
Divide by ordinary shares 180,000
Diluted earnings per share P 13.71

Problem 20-4
Required:
1. Basic earnings per share

Net Income P 2,000,000

Divide by ordinary shares actually outstanding 100,000
Basic earnings per share P 20

2. Diluted earnings per share

Net Income P 2,000,000

Add: Interest expense on bonds payable 40,000
(5% x 800,000)
Income tax (30% x 40,000) (12,000) 28,000
Adjusted net income 2,028,000

Ordinary shares actually outstanding 100,000

Assumed issued ordinary shares through 12,000
conversion of bonds payable
(800,000/10,000 x 150)
Total ordinary shares 112,000

Diluted earnings per share (2,028,000/112,000) P 18.11

Problem 20-5
Required:
1. Basic earnings per share

Net Income P 2,850,000

Less: Preference dividend (24,000 x 10) 240,000
Adjusted net income 2,610,000
Divide by ordinary shares actually outstanding 90,000
Basic earnings per share P 29
 2. Diluted earnings per share

Net Income P 2,850,000

Ordinary shares actually outstanding 90,000

Assumed issued ordinary shares through 20,000
conversion of preference shares
Total ordinary shares 110,000

Diluted earnings per share (2,850,000/110,000) P 25.91

Problem 20-6
Required:
1. Basic earnings per share

January 1, outstanding 200,000

September 1, conversion (30,000 x 5 x 4/12) 50,000
Average ordinary shares 250,000

Net Income P 5,000,000

Preference dividend (3,000,000 x 10%) (300,000)
Net income to ordinary shares 4,700,000
Basic earnings per share (4,700,000 / 250,000) P 18.80

2. Diluted earnings per share

Net Income P 5,000,000

January 1, outstanding 200,000

September 1, conversion (30,000 x 5) 150,000
Total ordinary shares 350,000

Diluted earnings per share (5,000,000/350,000) P 14.29

Problem 20-7
Required:
1. Basic earnings per share

Net Income P 7,500,000

Divide by ordinary shares actually outstanding 200,000
Basic earnings per share P 37.50

2. Diluted earnings per share

Net Income P 7,500,000

Option shares 50,000

Multiply by: Total option price 60
Proceeds from assumed exercised options 3,000,000
Divide by average market price 75
Assumed treasury shares 40,000

Ordinary shares actually outstanding

200,000
Incremental ordinary shares:
 Option shares 50,000
Assumed treasury shares (40,000) 10,000
Total ordinary shares 210,000

Diluted earnings per share (7,500,000/210,000) P 35.71

Problem 20-8
Required:
1. Basic earnings per share

Operating Revenue 5,600,000

Less: Operating expenses 3,000,000
Income before tax 2,600,000
Less: Income tax (30% x 2,600,000) 780,000
Net Income 1,820,000
Divide by ordinary shares actually outstanding 200,000
Basic earnings per share P 9.10

2. Dilutive earnings per share

The amount of diluted earnings per share is the same as the basic earnings per share because
the share options are antidilutive.
To be dilutive the option price must be lower than the average market price. In this case, the
option price of P25 is higher than the average market price of P20. Accordingly, the share options
are ignored in computing diluted earnings per share.
The bonds are also ignored because they are nonconvertible. Nonconvertible securities never
become potential ordinary shares.
Problem 20-9
Required:
1. Basic earnings per share

Net Income P 3,000,000

Divide by ordinary shares actually outstanding 60,000
Basic earnings per share P 50

2. Diluted earnings per share

Net Income P 3,000,000

Option shares 20,000

Multiply by: Total option price 160
Proceeds from assumed exercised options 3,200,000
Divide by average market price 250
Assumed treasury shares 12,800

Ordinary shares actually outstanding

60,000
Incremental ordinary shares:
Option shares 20,000
Assumed treasury shares (12,800)
Total 7,200
Multiply by 9/12 5,400
Total ordinary shares 65,400

Diluted earnings per share (3,000,000/65,400) P 45.87

Problem 20-10
Required:
1. Basic earnings per share

Net Income P 5,500,000

January 1 Outstanding 100,000

April 1, Exercise of share options (50,000 x 9/12) 37,500
Total ordinary shares actually outstanding 137,500

Basic earnings per share (5,500,000/137,500) P 40

2. Diluted earnings per share

Net Income P 5,500,000

Option shares 50,000

Multiply by: Total option price 120
Proceeds from assumed exercised options 6,000,000
Divide by average market price 400
Assumed treasury shares 15,000

January 1, Outstanding 100,000

April 1, Exercise of share options 37,500
(50,000 x 9/12)
Incremental ordinary shares:
Option shares 50,000
Assumed treasury shares (15,000)
Total 35,000
Multiply by: 3/12
Weighted average of incremental shares 8,750
Total ordinary shares 146,250

Diluted earnings per share (5,500,000/146,250) P 37.61