MODULE 15 EPS & BVPS

LEARNING OBJECTIVES:
1. Describe the accounting for the issuance, conversion, and retirement of convertible
securities.
2. Explain the accounting for convertible preferred stock.
3. Contrast the accounting for share warrants and for share warrants issued with other
securities.
4. Describe the accounting for share compensation plans.
5. Discuss the controversy involving share compensation plans.
6. Compute earnings per share in a simple capital structure.
7. Compute earnings per share in a complex capital structure.
8. Define book value per share.
9. Compute for the book value per share.

OVERVIEW
PAS 33 Earnings Per Share sets out how to calculate both basic earnings per share (EPS) and
diluted EPS. The calculation of Basic EPS is based on the weighted average number of ordinary
shares outstanding during the period, whereas diluted EPS also includes dilutive potential
ordinary shares (such as options and convertible instruments) if they meet certain criteria.
The book value per share (BVPS) is a ratio that weighs stockholders' total equity against the
number of shares outstanding. In other words, this measures a company's total assets, minus
its total liabilities, on a per-share basis.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com; http://www.ifrsbox.com
A synchronous discussion for this lesson will be scheduled on October 13, 2020 (Tuesday 7:30
– 8:30 AM)

Earnings per share indicates the income earned by each ordinary share.
 Companies report earnings per share only for ordinary shares.
 When the income statement contains discontinued operations, companies are required
to report earnings per share from continuing operations and net income on the face of
the income statement.

Simple Structure--Only ordinary shares; no potentially dilutive securities.

Complex Structure--Potentially dilutive securities are present.
“Dilutive” means the ability to influence the EPS in a downward direction.

Preferred Share – non-cumulative

Subtracts the current-year preference share dividend from net income to arrive at income
available to ordinary shareholders, only when declared.
Preference Share - Cumulative
Preference dividends are subtracted on cumulative preference shares, whether declared or not.

Weighted-Average Number of Shares

Companies must weight the shares by the fraction of the period they are outstanding.
When share dividends or share splits occur, companies need to restate the shares outstanding
before the share dividend or split.

Diluted EPS – Convertible Securities

Measure the dilutive effects of potential conversion on EPS using the if-converted method.
This method for a convertible bond assumes:
(1) the conversion at the beginning of the period (or at the time of issuance of the security, if
issued during the period), and
(2) the elimination of related interest, net of tax.

Potential diluters:
Convertible Bonds
Per Share Effect of 8% Bonds (If-Converted Method), Diluted Earnings per Share
Incremental EPS on bonds = Interest exp. on bonds (net)
# of OS If bonds were converted
Note : If incremental EPS on bonds is lower than BEPS it
will give dilutive effect on EPS.

Options and Warrants

Diluted EPS – Options and Warrants
Measure the dilutive effects of potential conversion using the treasury-share method.
This method assumes:
(1) company exercises the options or warrants at the beginning of the year (or date of issue
if later), and
(2) that it uses those proceeds to purchase ordinary shares for the treasury.

Per Share Effect of Options (Treasury-Share Method), Diluted Earnings per Share
Incremental shares = Option shares – Assumed Treasury
Assumed TS = Option shares x (option price +FV of option)
Ave. M.V. of shares
Note: to determine whether option is dilutive, the option price
must be lower than the average market value of shares.

Convertible Preference Share

Per Share Effect of 10% Convertible Preference Shares (If-Converted Method), Diluted
Earnings per Share
Incremental EPS on PS = PS dividends_________
# of OS if PS is converted
Note: when incremental EPS is lower than BEPS, it will give dilutive effect on EPS.

Steps for computing diluted earnings per share:

1. Determine, for each dilutive security, the per share effect assuming
exercise/conversion.
2. Rank the results from step 1 from smallest to largest earnings effect per share.
 3. Beginning with the earnings per share based upon the weighted-average of
ordinary shares outstanding, recalculate earnings per share by adding the
smallest per share effects from step 2. Continue this process so long as each
recalculated earnings per share is smaller than the previous amount.

EPS Presentation and Disclosure

A company should show per share amounts for:
 Income from continuing operations,
 Discontinued operations, and
 Net income.

Per share amounts for a discontinued operation should be presented on the face of the
income statement or in the notes.

Book value per share

Book value per share – measures the amount each share would received in the event of
liquidation.

Formula for the computation of book value per share is:

Simple capital structure (one class of shares)

Book value per share = Total shareholders’ equity
Number of shares outstanding

Complex structure (two or more classes of shares)

Book value per share = Preference shareholders’ equity
on preference Number of Preference shares outstanding

Book value per share = Ordinary shareholders’ equity

on ordinary stock Number of ordinary share outstanding

Preference shareholders’ equity

The preference shareholders’ equity includes the following:
a. Liquidation value (Par value + Liquidation Premium)
b. Equity on dividends
 Preference shares are cumulative – allocate all dividends in arrears
 Preference shares are non-cumulative – allocate the current year
dividend only.

Ordinary shareholders’ equity

Is the residual amount after deducting preference shareholders’ equity from the total
shareholders’ equity. The ordinary shareholders’ equity is computed as follows:
Total shareholders’ equity xx
Less: Preference shareholders’ equity (xx)
Ordinary shareholders’ equity xx

Subscription receivable
For purposes of book value per share computation, subscription receivable is not
deducted from total shareholders’ equity. This is because in case of corporate
 liquidation, any unpaid subscription must be collected and used to settle the corporation
obligation to outside creditors.

Illustration: One class of shares

ABC Co.’s shareholders’ equity consist of the following

Share capital, P10 par, 100,000 shares issued 1,000,000
Subscribed share capital 500,000
Share premium 370,000
Subscription receivable (200,000)
Retained Earnings 660,000
Revaluation Surplus 140,000
Cumulative Translation losses on foreign operation (100,000)
Treasury shares, at cost, 10,000 shares (70,000)
Total Shareholder’s equity 2,300,000

Requirements: Compute for the book value per share.

Solution:
The number of shares outstanding is computed as follows
Number of shares issued 100,000
Number of shares subscribed (500,000/10 par) 50,000
Total 150,000
Number of treasury shares (10,000)
Number of shares outstanding 140,000

Book value per = Total shareholder’s equity

Number of shares outstanding

Book value per share = 2,500,000

140,000

Book Value per share = 17.86

Subscription receivable is not deducted from the total shareholder’s equity used as numerator
from the book value per share computation. The subscription receivable is simply added back,
(I,e., 2,300,000 + 200,000 = 2,500,000) or simply ignored in computing for the total
shareholder’s equity.

Illustration 2: Two classes of shares – Cumulative preference share

ABS Co.’s year-end shareholder’s equity consists of the following:

Preference share, 10% cumulative, P100 par, 20,000 shares 2,000,000
Ordinary share, 10 par, 100,000 shares issued 1,000,000
Retained Earnings 820,000
Total shareholder’s equity 3,820,000

Dividends are in arrears for three years

Requirements: Compute for the book value per share for each class of shares.
Solutions:
Total shareholder’s equity 3,820,000
Preference shareholder’s equity:
Aggregate par value 2,000,000
Dividends in arrears (2Mx10%x3 years) 600,000 (2,600,000)
Ordinary shareholder’s equity 1,220,000
Divide by: Number of ordinary shares outstanding / 100,000
Book value per share (outstanding shares) 12.20

Book value per share = Preference shareholder’s equity

(Preference shares) Number of Preference share outstanding

Book value per share = 2,600,000

(Preference shares) 20,000

Book value per share (Preference shares) = 130

Participating preference
When preference shares are participating, the excess of the total shareholders’ equity over
allocated amount to preference shares and ordinary shares is allocated to both participating
shares and ordinary shares pro rate base on aggregate par values. The following are
guidelines when preference shares are participating:
1. Allocate to preference share their liquidation value or aggregate par value. If preference
shares are non-cumulative, allocate current years dividend only.
2. The ordinary shares are allocated one year dividends by multiplying the aggregate par
par value with the preference dividend rate. If there is more than one type of preference
share, the lowest rate will be used.
3. The excess of total shareholders’ equity over 1& 2 above is allocated on a pro rata base
on aggregate par values.

Summary:
 Book value per share = Equity / number of shares outstanding
 Subscription receivable is not deducted from total shareholders’ equity for purposes of
book value per share computation.
 Where there are two or more classes of shares capital, the total shareholders’ equity is
allocated to various classes of shares using the residual equity theory.
 Preference shareholders’ equity is equal to the sum of the following:
a. Liquidation value or aggregate par value
b. All dividends in arrears for cumulative preference; 1 year dividend for
noncumulative preference share.
c. Amount of participation, if preferred is participating.
 If preference shares are participating, ordinary share are allocated 1-year dividends
using the lowest preference dividends rate.
 The balance for participation is allocated to the various classes of shares pro rata base
on aggregate par value.
MODULE # 15 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
EPS/BVPS
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before October 16, 2020 (Friday)

1.On December 31, 2020, Superior, Inc. had 600,000 shares of ordinary stock issued and outstanding. Superior issued a 10
percent stock dividend on July 1, 2021. On October 1, 2021, Superior reacquired 48,000 shares of its ordinary stock
and recorded the purchase using the cost method of accounting for treasury stock. What number of shares should be
used in computing basic earnings per share for the year ended December 31, 2021?
a. 612,000
b. 618,000
c. 648,000
d. 660,000

2. At December 31, 2020, Murdock Company had 150,000 shares of ordinary stock issued and outstanding. On April 1,
2021, an additional 30,000 shares of ordinary stock were issued. Murdock's net income for the year ended December
31, 2021, was 517,500. During 2021, Murdock declared and paid 300,000 in cash dividends on its nonconvertible
preferred stock. The basic earnings per ordinary share, rounded to the nearest penny, for the year ended December
31, 2021, should be
a. 3.00
b. 2.00
c. 1.45
d. 1.26

3. The Thomas Company's net income for the year ended December 31 was 30,000. During the year, Thomas declared
and paid 3,000 in cash dividends on preferred stock and 5,250 in cash dividends on ordinary stock. At December 31,
36,000 shares of ordinary stock were outstanding, 30,000 of which had been issued and outstanding throughout the
year and 6,000 of which were issued on July 1. There were no other ordinary stock transactions during the year, and
there is no potential dilution of earnings per share. What should be the year's basic earnings per ordinary share of
Thomas, rounded to the nearest penny?
a. 0.66
b. 0.75
c. 0.82
d. 0.91

4. Landrover, Inc. had 150,000 shares of ordinary stock issued and outstanding at December 31, 2020. On July 1,
2021, an additional 25,000 shares of ordinary stock were issued for cash. Landrover also had unexercised stock
options to purchase 20,000 shares of ordinary stock at 15 per share outstanding at the beginning and end of 2021.
The market price of Landrover's ordinary stock was 20 throughout 2021. What number of shares should be used in
computing diluted earnings per share for the year ended December 31, 2021?
 a. 182,500
b. 180,000
c. 177,500
d. 167,500

5. Glendale Enterprises had 200,000 shares of ordinary stock issued and outstanding at December 31, 2020. On July 1,
2021, Glendale issued a 10 percent stock dividend. Unexercised stock options to purchase 40,000 shares of ordinary
stock (adjusted for the 2021 stock dividend) at 20 per share were outstanding at the beginning and end of 2021. The
market price of Glendale's ordinary stock (which was not affected by the stock dividend) was 25 per share during
2021. Net income for the year ended December 31, 2021, was 1,100,000. What should be Glendale's 2021 diluted
earnings per ordinary share, rounded to the nearest penny?
a. 4.23
b. 4.82
c. 5.00
d. 5.05

6. On January 2, 2020, Worley Co. issued at par 50,000 of 4 percent bonds convertible, in total, into 5,000 shares of
Worley's ordinary stock. No bonds were converted during 2020. Throughout 2020 Worley had 5,000 shares of
ordinary stock outstanding. Worley's 2020 net income was 5,000. Worley's income tax rate is 40 percent. No
potentially dilutive securities other than the convertible bonds were outstanding during 2020. Worley's diluted
earnings per share for 2020 would be
a. 0.58.
b. 0.62.
c. 0.70.
d. 1.16.

7. At December 31, 2020, the Roberts Company had 700,000 shares of ordinary stock outstanding. On September 1,
2021, an additional 300,000 shares of ordinary stock were issued. In addition, Roberts had 20,000,000 of 8 percent
convertible bonds outstanding at December 31, 2020, which are convertible into 400,000 shares of ordinary stock.
No bonds were converted into ordinary stock in 2021. The net income for the year ended December 31, 2021, was
6,000,000. Assuming the income tax rate was 40 percent, what should be the diluted earnings per share for the year
ended December 31, 2021?
a. 5.00
b. 5.53
c. 5.80
d. 8.30

8. The 2021 net income of Atwater Inc. was 200,000 and 100,000 shares of its ordinary stock were outstanding during
the entire year. In addition, there were outstanding options to purchase 10,000 shares of ordinary stock at 10 per
share. These options were granted in 2020 and none had been exercised by December 31, 2021. Market prices of
Atwater's ordinary stock during 2021 were

January 1 20 per share

December 31 40 per share
Average Price 25 per share

The amount that should be shown as Atwater's diluted earnings per share for 2021 (rounded to the nearest cent) is
 a. 2.00.
b. 1.95.
c. 1.89.
d. 1.86.

9. Zacor Incorporated has 2,500,000 shares of ordinary stock outstanding on December 31, 2020. An additional
500,000 shares of ordinary stock were issued April 1, 2021, and 250,000 more on July 1, 2021. On October 1, 2021,
Zacor issued 5,000, 1,000 face value, 7 percent convertible bonds. Each bond is convertible into 40 shares of
ordinary stock. No bonds were converted into ordinary stock in 2021. What is the number of shares to be used in
computing basic earnings per share and diluted earnings per share, respectively?
a. 2,875,000 and 2,925,000
b. 2,875,000 and 3,075,000
c. 3,000,000 and 3,050,000
d. 3,000,000 and 3,200,000

10. The following share capital transactions pertains to Joey de Venecia for the year 2021:
January 1 Shares outstanding 44,000
February 1 Shares issued for cash 56,000
May 1 shares reacquired 25,000
August 1Receipt of 25% stock dividends
September 1 Resold part of treasury share 10,000
November1 Issued 2-for-1 stock split
What is the weighted average ordinary share outstanding?
a. 187,500 b. 203,333 c. 207,500 d. 250,000

11. ANIA Corporation's statement of financial position at December 31, 2019 reports the following shareholder's equity
balances:
8% Preference Share Capital, P 30 par, 50,000 shares issued and outstanding – 1,500,000
Ordinary Share Capital, P 10 par value, 90,000 shares issued and outstanding- 900,000
Additional Paid in Capital – 450,000 and Retained Earnings – 350,000
Dividend on preferred stock have been paid through 2016 but have not been declared for 2017 and 2018
If the preference share is cumulative and has a liquidation value of P 45, what is the book value per
ordinary share?
a. P 6.56 b. P 10.56 c. P 52.20 d. P 49.80

12. REX Company's stockholders' equity at December 31, 2019 consisted of the following:
11% noncumulative preference share P 35 par, 30,000 shares issued 1,050,000-
Ordinary share, P 15par, 150,000 shares issued- 2,250,000
Additional paid in capital- 350,000 and Revaluation surplus- 335,000
Total Retained earnings- 425,000 Retained earnings appropriated- 90,000
 Dividends on preferred stock have not been paid since 2017. The preferred stock has a liquidating value of P42 per
share and a call price of P44 per share. What is the book value per share of ordinary share?
a. P 30 b. P 18.77 c. P 18.37 d. P 20.23

13. Ferrero Corp. provided the following data on December 31, 2020
Ordinary share capital, 12,000 shares 1,200,000
Subscribed share capital, 15,000 shares 3,750,000
Subscription receivable 860,000
Share premium 600,000
Retained Earnings 750,000
Treasury shares, 10,000 shrs. - at cost 560,000
What is the book value per share?
a. 268 b. 337.65 c. 190 d. 463

14. The shareholder’s equity of Joy Co. on December 31, 2021 shows the following account balances:

10% Preference share, 5,000 shares, 100 par P500,000

12% Preference share, 6,000 shares, 100 par 600,000
Ordinary share, 10,000 shares, P40 par 400,000
Share premium 320,000
Accumulated profits 480,000

The 10% preference share is cumulative and fully participating, while the 12% preference share is non-cumulative
and fully participating. The last payment of dividends was on December 31, 2019.

What is the book value per share of ordinary shares?

a. 44.00 b. 59.68 c. 60.27 d. 102.80