number of ordinary shares that would have been issued

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

Dilutive potential Ordinary shares

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

Options, warrants ordinary shares

For the purpose of calculating diluted earnings per share,
an entity shall assume the exercise of dilutive options and
warrants of the entity. The assumed proceeds from these
instruments shall be regarded as having been received
from the issue of ordinary shares at the average market
price of ordinary shares during the period. The difference
between the number of ordinary shares issued and the
 b. Recognized whether they are dilutive or
antidilutive
c. Recognized only if they are antidilutive
d. Recognized only if they are dilutive

1. The EPS computation that is forward-looking and

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

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

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

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

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

16. Determine the number of shares used to compute

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

17. The basic earnings per share should be

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

18. Determine the number of shares used to compute

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

19. The diluted earnings per share should be

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