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Question 1) (Adapted from Chow, L., Kan, S., Taylor, D. & Tsui, C. (2006).

Advanced
Financial Accounting in Hong Kong. Hong Kong: Longman.)

The draft income statement of ABC Ltd for the year ended 31 December 20X4 is set out
below:

Draft Income Statement

For the year ended 31 December 20X4

$ $

Profit before tax 2,530,000

Less: Taxation - profit tax 1,127,000

Underprovision for 20X3 23,000 (1,150,000)

Profit after tax 1,380,000

Less: Transfer to
115,000
reserves

Dividends

Preference dividend 276,000

Ordinary dividend 414,000 (805,000)

Retained profit for the year 575,000

On 1 January 20x4, the issued share capital of ABC Ltd was 4,600,000 6% preference shares
of $1 each and 4,140,000 ordinary shares of $1 each.
Required:

Calculate the earnings per share in respect of the year ended 31 December 20x4 for each of
the following circumstances. (Each of the five circumstances (a) to (e) is to be dealt with
separately):

a. On the basis that there was no change in the issued share capital of the company
during the year ended 31 December 20x4.
b. On the basis that the company made a bonus issued on 1 October 20x4 of one
ordinary share for every four shares in issue at 30 September 20x4.
c. On the basis that the company made a rights issue of $1 ordinary shares on 1
October 20x4 in the proportion of one for every five shares held, at a price of $1.20. The
middle market price for the shares on the last day of quotation cum rights was $1.80 per
share.

(a) Profit after tax $1,380,000


Less: Preference dividends (276,000)
$1,104,000

Basic EPS = $1,104,000 = 26.7¢


4,140,000

(b) Number of shares in issue during the year:


______________________________________________________________
Time Shares in Bonus issue No. of
Fraction Issue Factor Shares

1.1.20X4 ≈
30.09.20X4 (before issue) 9/12 x 4,140,000 x 5/4 3,881,250

1.10.20X4 ≈
31.12.20X4 (after issue) 3/12 x 4,140,000 x 5/4 1,293,750
5,175,000

Basic EPS = $1,104,000 ___ = $21.3¢


4,140k x 5/4 x 9/12 + 4,140k x 5/4 x 3/12
_______________________________________________________________

(c) Theoretical ex-rights value = 5 x $1.8 + 1 x $1.2


6
= $1.70

No. of new shares issued under rights issue: 4,140,000 ÷ 5 = 828,000 shares

Number of shares in issue during the year:


______________________________________________________________
Time Shares in Rights issue No. of
Fraction Issue Factor Shares

1.1.20X4 ≈
30.09.20X4 (before issue) 9/12 x 4,140,000 x 1.8/1.7 3,287,647

1.10.20X4 ≈
31.12.20X4 (after issue) 3/12 x 4,968,000(4140kx6/5) 1,242,000
4,529,647

Basic EPS = $1,104,000_________________


(4,140,000 x 1.8/1.7 x 9/12) + (4,140,000 x 6/5 x 3/12)

= $1,104,000 = 24.4¢
4,529,647
_______________________________________________________________