Deck 5: Earnings Per Share

Question 1

During 2020, Neimer Ltd. had 350,000 common shares, 60,000 non-cumulative convertible preferred shares, and $ 1,200,000 10% convertible bonds outstanding. The preferred shares are convertible into 80,000 common shares. During 2020, Neimer paid dividends of $ 1.00 per share to the common shares and $ 1.50 per share to the preferred shares. Each $ 1,000 bond is convertible into 50 common shares. The net income for 2020 was $ 1,000,000 and the income tax rate was 30%. Basic earnings per share for 2020 is

A) $ 2.04.
B) $ 2.60.
C) $ 2.86.
D) $ 3.03.

Answer 1

B

Question 2

At December 31, 2019, Parrot Corp. had 1,000,000 common shares outstanding (no preferred shares issued). An additional 100,000 shares were issued on April 1, 2020, and 240,000 more on September 1. On October 1, Parrot issued $ 3,000,000 (par value) 9% convertible bonds. Each $ 1,000 bond is convertible into 40 common shares. No bonds have been converted yet. The number of shares to be used in calculating basic earnings per share and diluted earnings per share for 2020 is

A) 1,155,000 and 1,155,000.
B) 1,155,000 and 1,185,000.
C) 1,155,000 and 1,275,000.
D) 1,540,000 and 1,660,000.

Answer 2

B

Question 3

At December 31, 2019 and 2020, Danish Corp. had 100,000 common shares and 10,000, $ 5, no par value cumulative preferred shares outstanding. No dividends were declared in 2019 or 2020. Net income for 2020 was $ 400,000. For 2020, basic earnings per share would be

A) $ 4.00.
B) $ 3.50.
C) $ 3.00.
D) $ 2.00.

Answer 3

B

Question 4

At December 31, 2020, Helium Corp. had 650,000 common shares outstanding, 500,000 of which were issued and outstanding throughout the year and 150,000 of which were issued on October 1, 2020. Net income for calendar 2020, was $ 382,500. There are no preferred shares issued. Basic earnings per share for 2020 would be

A) $ 0.43.
B) $ 0.59.
C) $ 0.71.
D) $ 0.77.

Question 5

In calculating basic earnings per share, if the preferred shares are cumulative, the amount that should be deducted as an adjustment to the numerator is the

A) annual preferred dividend.
B) preferred dividends in arrears.
C) annual preferred dividend times (one minus the income tax rate).
D) preferred dividends in arrears times (one minus the income tax rate).

Question 6

Standard setters require the EPS calculation be included

A) only when there is a complex capital structure.
B) under both IFRS and ASPE.
C) when is an indicator of cumulative dividend payments.
D) for all publicly traded companies.

Question 7

At January 1, 2020, Marvel Corp. had 200,000 common shares outstanding (no preferred shares issued). On July 1, 2020, the corporation issued 225,000 shares, and reported net income of $ 315,000 for calendar 2020. Basic earnings per share for 2020 would be

A) $ 2.80.
B) $ 1.40.
C) $ 1.01.
D) $ 0.74.

Question 8

With respect to the calculation of earnings per share, which of the following would suggest a simple capital structure?

A) common shares and convertible bonds
B) earnings derived from one primary line of business
C) common shares and non-convertible preferred shares
D) common shares and convertible preferred shares

Question 9

In calculating diluted earnings per share, dividends on non-convertible cumulative preferred shares should be

A) ignored.
B) deducted from net income whether declared or not.
C) deducted from net income only if declared.
D) added back to net income whether declared or not.

Question 10

In calculating the weighted average of common shares outstanding, when a stock dividend or stock split occurs, the additional shares are

A) ignored.
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.

Question 11

Diluted EPS is only required when

A) a company has discontinued operations.
B) there is a complex capital structure.
C) basic EPS can't be calculated.
D) a company uses ASPE.

Question 12

Under IFRS, common shares are also called

A) ordinary shares.
B) potential shares.
C) treasury shares.
D) non-dilutive shares.

Question 13

At December 31, 2019, Columbus Inc. had 3,000,000 common shares outstanding. An additional 500,000 common shares were issued on April 1, 2020, and 250,000 more on July 1, 2020. On October 1, 2020, Marion issued 12,500, $ 1,000 par value, 8% convertible bonds. Each bond is convertible into 20 common shares. No bonds were converted in 2020. What is the number of shares to be used in calculating 2020 basic earnings per share and diluted earnings per share, respectively?

A) 3,500,000 and 3,500,000
B) 3,500,000 and 3,562,500
C) 3,500,000 and 3,750,000
D) 3,750,000 and 4,250,000

Question 14

At December 31, 2019, Pliers Corp. had 380,000 common shares outstanding. No additional common shares were issued during 2020. On January 1, 2020, Pliers issued 420,000 non-cumulative, non-convertible preferred shares. During 2020, Pliers paid cash dividends of $ 200,000 to the common shares and $ 160,000 to the preferred shares. Net income for calendar 2020, was $ 540,000. Their income tax rate is 40%. Basic earnings per share for 2020 is

A) $ 0.42.
B) $ 1.84.
C) $ 1.00.
D) $ 1.42.

Question 15

At December 31, 2019, Grieger Corp. had 300,000 common shares outstanding. No common shares were issued during 2020; however, on January 1, 2020, Grieger issued 160,000 non-cumulative, non-convertible preferred shares. During 2020, Grieger paid cash dividends of $ 100,000 to the common shareholders and $ 60,000 to the preferred shareholders. Net income for calendar 2020 was $ 450,000. Basic earnings per share for 2020 would be

A) $ 0.20.
B) $ 1.30.
C) $ 1.50.
D) $ 1.70.

Question 16

When a corporation agrees to issue common shares if some specific future event occurs, such shares are known as

A) potential treasury shares.
B) potential common shares.
C) contingently issuable shares.
D) convertible common shares.

Question 17

EPS is important to common shareholders for all of the following reasons, EXCEPT

A) it indicates the amount of income that is earned by each common share.
B) common shareholders have a residual interest in the company.
C) it is an indicator of cumulative dividend payments.
D) it is an indicator of the amount of income earned by each share.

Question 18

Which of the following statements is INCORRECT?

A) Options that are out of the money are ignored in earnings per share calculations.
B) The treasury stock method is used for written call options.
C) Corporations that have only antidilutive securities are not permitted to increase their earnings per share and are required to report only basic earnings per share.
D) Contingently issuable shares are never included in diluted earnings per share calculations.

Question 19

EPS is normally

A) on the income statement of privately held and publicly traded corporations.
B) in the notes to the financial statements.
C) not a requirement under ASPE.
D) provided at the discretion of management.

Question 20

At January 1, 2020, Dango Ltd had 450,000 common shares outstanding (no preferred shares issued). During 2020, Dango issued 60,000 shares on May 1, purchased 36,000 treasury shares on September 1, and issued 42,000 more shares on November 1. The weighted average of common shares outstanding for 2020 is

A) 497,000.
B) 485,000.
C) 509,000.
D) 469,000.

Question 21

Which of the following statements is correct?

A) Options that are in the money are ignored in earnings per share calculations.
B) Options that are out of the money are ignored in earnings per share calculations.
C) Contingently issuable shares are never included in diluted earnings per share calculations.
D) The treasury stock method is used for written put options.

Question 22

In calculating diluted earnings per share, the treasury stock method is used for written call options and equivalents to reflect assumed reacquisition of common shares at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the calculation would

A) fairly present diluted earnings per share on a prospective basis.
B) fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
C) reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
D) be antidilutive.

Question 23

On December 31, 2019, Lingo. had 1,000,000 common shares outstanding. On January 1, 2020, Lingo issued 250,000 non-cumulative preferred shares, which were convertible into 500,000 common shares. During 2020, Lingo paid cash dividends of $ 450,000 to the common shares and $ 150,000 to the preferred shares. Net income for calendar 2020, was $ 4,500,000. Assuming an income tax rate of 30%, the diluted earnings per share for 2020 is

A) $ 0.33.
B) $ 3.00.
C) $ 2.57.
D) $ 4.50.

Question 24

At December 31, 2019, St. John's Limited had 4,000,000 common shares outstanding (no preferred shares issued). An additional 250,000 common shares were issued on July 1, 2020, and 500,000 more on October 1, 2020. As well, on April 1, 2020, St. John's issued 10,000, $ 1,000 face value, 8% convertible bonds. Each bond is convertible into 40 common shares. No bonds were converted in 2020. What is the number of shares to be used in calculating basic earnings per share and diluted earnings per share, respectively, for 2020?

A) 4,250,000 and 4,550,000
B) 4,250,000 and 4,250,000
C) 4,250,000 and 4,650,000
D) 4,750,000 and 5,050,000

Question 25

At December 31, 2019, Felix Ltd. had 500,000 common shares outstanding (no preferred shares issued). On October 1, 2020, an additional 100,000 common shares were issued. In addition, Felix had $ 5,000,000, 6% convertible bonds outstanding at December 31, 2019, which are convertible into 225,000 common shares; however, no bonds were converted during 2020. Net income for calendar 2020 was $ 1,500,000. Assuming the income tax rate was 30%, the diluted earnings per share for 2020 would be

A) $ 3.26.
B) $ 2.40.
C) $ 2.28.
D) $ 2.00.

Question 26

What effect will the acquisition of treasury shares have on shareholders' equity and basic earnings per share, respectively?

Question 27

In calculating diluted earnings per share, the equivalent number of convertible preferred shares is added as an adjustment to the denominator. If the preferred shares are cumulative, which amount should then be added as an adjustment to the numerator?

A) annual preferred dividend
B) annual preferred dividend times (one minus the income tax rate)
C) annual preferred dividend times the income tax rate
D) annual preferred dividend divided by the income tax rate

Question 28

The reverse treasury stock method is used for

A) written call options.
B) written put options.
C) convertible preferred shares.
D) convertible bonds.

Question 29

At December 31, 2019, Pinwheel Ltd. had 900,000 common shares outstanding. In addition, the corporation had 350,000 non-cumulative preferred shares outstanding, which were convertible into 600,000 common shares. During 2020, Pinwheel paid cash dividends of $ 360,000 to the common shares and $ 225,000 to the preferred shares. Net income for 2020 was $ 1,350,000 and the income tax rate was 40%. Diluted earnings per share for 2020 is

A) $ 2.25.
B) $ 1.50.
C) $ 0.90.
D) $ 1.11.

Question 30

Information concerning the capital structure of Shepherd Corporation follows During 2020, Shepherd paid dividends of $ 1.00 per common share and $ 2.50 per preferred share. The preferred shares are non-cumulative, and convertible into 20,000 common shares. The 9% convertible bonds are convertible into 50,000 common shares. Net income for calendar 2020 was $ 500,000. Assume the income tax rate is 30%. Basic earnings per share for 2020 is

A) $ 3.33.
B) $ 3.65.
C) $ 4.75.
D) $ 5.00.

Question 31

On January 2, 2020, Helisinki Ltd. issued at par $ 300,000, 9% convertible bonds. Each $ 1,000 bond is convertible into 30 shares. No bonds were converted during 2020. There were 50,000 common shares outstanding during 2020 (no preferred shares issued). Helsinki's 2020 net income was $ 160,000 and their income tax rate was 30%. Helsinki's diluted earnings per share for 2020 would be

A) $ 2.71.
B) $ 3.03.
C) $ 3.20.
D) $ 3.58.

Question 32

When applying the treasury stock method, the price of the common shares used for the assumed repurchase is the

A) market price at the end of the year.
B) average market price during the year.
C) market price at the beginning of the year.
D) market price at the time the options or warrants were granted.

Question 33

The if-converted method of calculating earnings per share data assumes conversion of convertible securities as of the

A) beginning of the earliest period reported (or at time of issuance, if later).
B) beginning of the earliest period reported (regardless of time of issuance).
C) middle of the earliest period reported (regardless of time of issuance).
D) ending of the earliest period reported (regardless of time of issuance).

Question 34

Antidilutive securities

A) should be included in the calculation of diluted earnings per share but not basic earnings per share.
B) are those whose inclusion in earnings per share calculations would cause basic earnings per share to exceed diluted earnings per share.
C) include call options and warrants whose exercise price is less than the average market price of common shares.
D) should be ignored in all earnings per share calculations.

Question 35

During 2020, Madrid Ltd. had 200,000 common shares, 30,000 non-cumulative convertible preferred shares, and $ 1,500,000 10% convertible bonds outstanding. The preferred shares are convertible into 40,000 common shares. During 2020, Madrid paid dividends of $ 1.20 per share to the common shares and $ 2.00 per share to the preferred shares. Each $ 1,000 bond is convertible into 45 common shares. The net income for 2020 was $ 900,000 and the income tax rate was 30%. Diluted earnings per share for 2020 is

A) $ 2.98.
B) $ 3.38.
C) $ 3.27.
D) $ 3.41.

Question 36

Assume a corporation has two potentially dilutive convertible securities outstanding. The one that should be used first to calculate diluted earnings per share is the security with the

A) greater earnings adjustment.
B) greater earnings per share adjustment.
C) smaller earnings adjustment.
D) smaller earnings per share adjustment.

Question 37

When calculating diluted earnings per share, convertible bonds are

A) ignored.
B) assumed converted whether they are dilutive or antidilutive.
C) assumed converted only if they are antidilutive.
D) assumed converted only if they are dilutive.

Question 38

Dilutive convertible securities must be used in the calculation of

A) basic earnings per share only.
B) diluted earnings per share only.
C) diluted and basic earnings per share.
D) silly question: such securities are never included.

Question 39

On January 2, 2020, Delila Inc. issued at par $ 10,000 6% bonds convertible into 1,000 of their common shares. No bonds were converted during 2020. Throughout 2020, Delila had 1,000 common shares outstanding (no preferred shares issued). Delila's 2020 net income was $ 6,000, and their income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2020. Delila diluted earnings per share for 2020 would be

A) $ 3.00.
B) $ 3.21.
C) $ 3.30.
D) $ 6.42.

Question 40

In applying the treasury stock method to determine the dilutive effect of options and warrants, the proceeds assumed to be received upon exercise of the options and warrants

A) are used to calculate the number of common shares repurchased at the average market price, when calculating diluted earnings per share.
B) are added, net of tax, to the numerator of the calculation for diluted earnings per share.
C) are disregarded in the calculation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common shares.
D) are not included in the calculation.

Question 41

Standard setters are very specific regarding the calculation of EPS for all of the following reasons EXCEPT

A) predictor of future company value.
B) it can be used to assess management stewardship.
C) the income tax consequences of increased share value.
D) because of the dilutive nature of complex financial instruments.

Question 42

Why is diluted EPS useful?

Question 43

Basic and diluted earnings per share
Throughout the calendar year 2020, Kali Corporation has 400,000 common shares outstanding (no preferred shares issued). In addition, Collie has 5,000, 20-year, 7% bonds outstanding, issued at par in 2018. Each $ 1,000 bond is convertible into 20 common shares after June 30, 2021. Collie reported net income of $ 600,000 for calendar 2020. Their income tax rate is 30%.
Instructions
Calculate basic and diluted earnings per share for 2020.

Question 44

At December 31, 2019, Jack Russell Ltd. had 900,000 common shares outstanding (no preferred shares issued). On September 1, 2020, an additional 300,000 common shares were issued. In addition, Jack Russell had $ 10,000,000 (par value) 6% convertible bonds outstanding at December 31, 2019, which are convertible into 600,000 common shares. No bonds were converted in 2020. Net income for calendar 2020 was $ 3,750,000. Assuming the income tax rate is 30%, the diluted earnings per share for 2020 is

A) $ 2.35.
B) $ 2.61.
C) $ 2.72.
D) $ 3.75.

Question 45

Basic and diluted earnings per share
Barker Inc. reported net income (30% tax rate) of $ 1,600,000 for calendar 2020, and an average of 500,000 common shares outstanding during the year. Barker issued $ 2,000,000 par value, 10-year, 9% convertible bonds on January 1, 2018 at a $ 18,000 discount. The bonds are convertible into 60,000 common shares. Barker uses the straight-line method for amortizing the bond discount.
Instructions
Calculate basic and diluted earnings per share for 2020.

Question 46

At December 31, 2020, Spearmint Inc. had 300,000 common shares outstanding (no preferred shares issued). In addition, the corporation had granted 90,000 stock options to certain executives, and which gave them the right to purchase Spearmint's shares at the option price of $ 37 per share. None of these options have yet been exercised. The average market price of Spaniel's common shares during 2020 was $ 50. What is the number of shares that should be used in calculating diluted earnings per share for 2020?

A) 300,000
B) 323,400
C) 331,622
D) 366,600

Question 47

Why does the issuance of a stock dividend or stock split require a restatement (which is applied retroactively), but the issuance or repurchase of shares for cash does not?

Question 48

Major challenges for standard setters calculating EPS includes all of the following, EXCEPT

A) complex financial instruments.
B) redeveloping standards under ASPE.
C) treatment of conversion features.
D) dilutive securities.

Question 49

EPS presentation
When and how is EPS used and presented?

Question 50

All of the following regarding company valuation are true EXCEPT for

A) EPS is the preferred method recommended by standard setters.
B) sustainable cash flow or earnings can be used.
C) EPS can be used because it is considered reliable and all inclusive.
D) using EPS provides a very rough calculation only.

Question 51

Warrants exercisable at $ 20 each to obtain 50,000 common shares were outstanding during a period when the average market price of the common shares was $ 25. Application of the treasury stock method in calculating diluted earnings per share will increase the weighted average number of outstanding shares by

A) 50,000.
B) 40,000.
C) 12,500.
D) 10,000.

Question 52

At December 31, 2019, Skye Inc. had 500,000 common shares outstanding (no preferred shares issued). On July 1, 2020, an additional 50,000 common shares were issued. Skye also had unexercised call options to purchase 40,000 common shares at $ 15 per share outstanding throughout 2020. The average market price of Skye's common shares was $ 20 during 2020. The number of shares that should be used in calculating diluted earnings per share for 2020 is

A) 525,000.
B) 535,000.
C) 560,000.
D) 565,000.

Question 53

Information concerning the capital structure of Shelmardine Corporation follows During 2020, Shelmardine paid dividends of $ 1.00 per common share and $ 2.50 per preferred share. The preferred shares are non-cumulative, and convertible into 20,000 common shares. The 9% convertible bonds are convertible into 50,000 common shares. Net income for calendar 2020 was $ 500,000. Assume the income tax rate is 30%. What is the diluted earnings per share for 2020?

A) $ 4.00
B) $ 3.68
C) $ 3.54
D) $ 2.94

Question 54

EPS calculations
What are the two formulas normally calculated only for common shares, and how and why are they used?

Question 55

Earnings per share
Define the following
a) The calculation of earnings per share
b) Complex capital structure
c) Basic earnings per share
d) Diluted earnings per share

Question 56

The main difference between IFRS and ASPE as it relates to EPS calculations is

A) there is no difference.
B) diluted EPS applies only to IFRS, both use basic EPS.
C) only companies with complex financial structures must calculate EPS under IFRS.
D) there are no prescribed standards under ASPE.

Question 57

EPS disclosures under IFRS
What EPS disclosures are required under IFRS?

Question 58

Explain the difference between a simple capital structure and a complex capital structure.

Question 59

Throughout 2020, Moon Ltd. had 1,200,000 common shares outstanding. As well, the corporation paid $ 300,000 in preferred dividends and reported net income of $ 5,100,000 for 2020. In connection with the acquisition of a subsidiary company in June 2019, Moon is required to issue 50,000 additional common shares on July 1, 2021, to the former owners of the subsidiary. Moon's diluted earnings per share for 2020 should be

A) $ 4.25.
B) $ 4.08.
C) $ 4.00.
D) $ 3.84.

Question 60

Weighted average of common shares outstanding
At January 1, 2020, Elan Corporation had 300,000 common shares outstanding (no preferred issued). On March 1, the corporation issued 45,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2 for 1 stock split. On October 1, the corporation purchased on the open market 180,000 of its own shares at $ 35 each and retired them.
Instructions
Calculate the weighted average number of common shares outstanding to be used in calculating earnings per share for 2020.

Question 61

Basic earnings per share
Assuming there were no preferred shares outstanding, calculate EPS for each year based on your calculations in Pr. 17-62.

Question 62

Weighted average calculations
Calculate the weighted average number of shares outstanding for each year.

Question 63

Basic and diluted earnings per share
Bloodhound Corp. provides the following data for calendar 2020 Instructions
a) Calculate basic earnings per share for 2020.
b) Calculate diluted earnings per share for 2020.

Question 64

Diluted earnings per share
During 2020, Basenji Corp. had 300,000 common shares outstanding. In addition, at December 31, 2020, 50,000 shares were issuable upon exercise of executive stock options, which require a $ 40 cash payment upon exercise (options were granted in 2018). The average market price of the common shares during 2020 was $ 50.
Instructions
Calculate the number of shares to be used in determining diluted earnings per share for 2020.

Question 65

Basic and diluted earnings per share
Aria Ltd. provides the following information for calendar 2020 Instructions
Calculate basic and diluted earnings per share for 2020.

Question 66

What are antidilutive securities and how do they affect EPS?

Question 67

Basic and diluted earnings per share
Chamaa Ltd. provides the following information for 2020 Instructions
Calculate basic and diluted earnings per share for 2020.

Question 68

Mangey Corp. had the following activity related to its common shares for the year ending December 31, 2020. In addition, the company issued 3,000, $ 2, cumulative preferred shares for $ 300,000, however,
dividends were not declared during 2020.
Instructions
a) Calculate the weighted average number of shares.
b) Calculate basic EPS.
c) Calculate full diluted EPS.

Question 69

Basic and diluted earnings per share
Arlt Inc., a publicly accountable corporation, has a July 31 year end. For the 2020 fiscal year, there were 100,000 common shares outstanding all year. Net income for the year ended July 31, 2020 was $ 950,000. Their income tax rate is 30%.
Part A During the 2019 fiscal year, Arlt issued at par a 5% convertible bond, face value $ 5,000,000. Each $ 1,000 bond is convertible into 20 common shares. No bonds were converted in 2019, however, on March 31, 2020, 50% of the bonds were converted into common shares.
Part B On August 1, 2019, Arlt issued 100,000, $ 2, cumulative, convertible preferred shares. Two preferred shares are convertible into one common share. On September 30, 2019, 20% of these preferred shares were converted to common shares. The preferred share dividend was declared and paid on June 15, 2020.
Instructions
Treating each part independently, calculate basic and diluted earnings per share for fiscal 2020.

Question 70

Explain the if-converted, treasury stock and reverse treasury stock methods that are used to consider the impact of potential common shares on diluted earnings per share.

Question 71

Explain the three steps that should be completed to calculate diluted EPS when there are multiple potentially dilutive financial instruments.

Question 72

Effect of dilutive securities on earnings per share calculations
A publicly accountable enterprise is planning on issuing the following two securities in the coming year
1. Convertible debt where mandatory conversion will take place five years after issue.
2. Debt with detachable warrants. The warrants can be exercised if profits exceed $ 1,000,000 in the next five years.
Instructions
Discuss how these two securities will affect the diluted earnings per share calculation.

Question 73

Basic and diluted earnings per share
The following data are presented by Quentin Corp. for calendar 2020 Additional information
1. The common and preferred shares and the convertible bonds were outstanding from the beginning of the year.
2. In 2020, a $ 500,000 dividend was declared and distributed; however, no dividends were declared in 2019.
3. The average market price of the common shares in 2020 was $ 30. The stock price was $ 27 on January 1, 2020, and $ 35 on December 31, 2020.
4. The convertible bonds were sold at par.
5. The income tax rate for 2020 is 30%.
Instructions
a) Calculate basic EPS.
b) Calculate diluted EPS.
c) Briefly discuss the usefulness of the EPS measure in general. What is the additional importance of reporting diluted EPS?