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Acct.

162 – Material 020


DIVIDENDS/ BOOK VALUE PER SHARE/ EARNINGS PER SHARE

DIVIDENDS

1. On December 31, 2016 and 2017, ABC had outstanding 40,000 preference shares with P100 par value and
6% cumulative, and 200,000 ordinary shares with P10 par. On December 31, 2017, dividends in arrears on
the preference amounted to P120,000. Cash dividends declared in 2017 totaled P440,000. What is the
dividend payable on each class of share capital?

2. ABC reported the following outstanding share capital on December 31, 2017:
 30,000 shares of 10% cumulative preference share, par value of P100 per share, fully participating
as to dividends. No dividends were in arrears in prior years.
 200,000 ordinary shares with par value of P10.
On December 31, 2017, the entity declared dividends of P1,000,000. What was the amount of dividends
payable to ordinary?

3. ABC reported the following share capital outstanding on December 31, 2017:
Ordinary share capital, P20 par value, 200,000 shares outstanding 4,000,000
Preference share capital, 6% P100 par, cumulative and fully participating, 10,000 outstanding1,000,000
Preference dividends have been in arrears for 2015, 2016 and 2017. On December 31, 2017, a total cash
dividend of P900,000 was declared. What amount should be recognized as dividend payable on the
preference and ordinary shareholders, respectively.

4. ABC had outstanding 300,000 ordinary shares of P20 par and 60,000 preference shares no par 8% with a
stated value of P50. The preference shares are cumulative and nonparticipating. Dividends have been paid
in every year except the past 2 years and the current year. The entity paid dividend of P500,000 in the current
year. What is the dividend payable to the preference shareholders in the current year?

5. ABC had 50,000 ordinary share of P100 par value and 25,000 preference shares of P100 par value, 6%
cumulative and participating. Dividends on the preference shares are two years in arrears including the
current year. The entity distributed P1,350,000 as dividends in the current year. What is the dividend payable
to the ordinary shareholders?

6. ABC had outstanding 50,000 8% preference share with P100 par value and 125,000 P30 par value ordinary
shares. Dividends have been paid every year except last year and the current year. The preference shares
are cumulative and nonparticipating. The entity distributed P2,500,000 as dividends in the current year. What
is the dividend payable to the ordinary shareholders?

BOOK VALUE PER SHARE

7. ABC reported the following shareholders’ equity on December 31, 2017:


Preference share capital, 12% cumulative, 3 years in arrears,
and participating, P100 par, 15,000 shares 1,500,000
Ordinary share capital, P100 par, 20,000 shares 2,000,000
Subscribed ordinary share capital, net of subscription receivable of P400,000 600,000
Treasury ordinary shares, 5,000 at cost 400,000
Share premium 300,000
Retained earnings 2,040,000
Compute the book value per preference share and per ordinary share.

8. ABC reported the following shareholders’ equity on December 31, 2017:


Preference share capital, 10% cumulative, P100 par, 40,000 shares 4,000,000
Ordinary share capital, P50 par, 200,000 shares 10,000,000
Subscribed ordinary share capital, net of subscription receivable of P1,500,000 2,000,000
Treasury ordinary shares, 20,000 shares at cost 1,200,000
Share premium 3,000,000
Accumulated profits 5,000,000
Preference dividends have not been paid for 3 years and the preference share has a P110 liquidation price.
Compute the book value per preference share and ordinary share.

9. ABC reported the following shareholders’ equity on December 31, 2017:


Preference share capital, 10% cumulative and nonparticipating, P100 par, 20,000 shares2,000,000
Ordinary share capital, P100 par, 40,000 shares 4,000,000
Subscribed ordinary share capital, 20,000 shares 2,000,000
Subscription receivable 500,000
Share premium 1,000,000
Retained earnings 2,400,000
Treasury ordinary shares, 10,000 at cost 800,000
The preference dividends are in arrears for 2015 to 2017. Compute the book value per ordinary share.

SHARE-BASED COMPENSATION

CASE 1
On January 1, 2017, ABC granted 60,000 share options to employees. The share options will vest at the end of
three years provided the employees remain in service until the. The option price is P60 and the par value per
share is P50. At the date of grant, the entity concluded that the fair value of the share options cannot be measured
reliably. The share options have a life of 4 years which means that the share options can be exercised within
one year after vesting. The share prices are P62 on December 31, 2017, P66 on December 31, 2018, P75 on
December 31, 2019 and P85 on December 31, 2020. All share options were exercised on December 31, 2020.
10. Compute the compensation expense for 2019.
11. Compute the compensation expense for 2020.
12. Prepare the entry upon exercise of the share options on December 31, 2020.
13. How much is the net increase in ABC’s equity resulting from the exercise of the options by employees?

CASE 2
On January 1, 2017, ABC granted share options to each of the 300 employees working in the sales department.
The option price is P80 and the par value is P50. The share options vest at the end of a 3-year period provided
that the employees remain in the entity’s employ and provided the volume of sales will increase by 10% per year.
The fair value of each share option on grant date is P30. If the sales increase by 10%, each employee will receive
200 share options. If the sales increase by 15%, each employee will receive 300 share options. On December
31, 2017, the sales increase by 10% and no employees left the entity. On December 31, 2018, the sales increase
by 15% and no employees have left. On December 31, 2019, the sales increase by 15% and 50 employees left
the entity.
14. What is the compensation expense for 2019?
15. What is the share premium upon exercise of the share options on December 31, 2019?
CASE 3
On January 1, 2017, ABC granted to senior executive 30,000 share options, conditional upon the executive’s
remaining in the entity’s employ until December 31, 2019. The par value per share is P50. The exercise price is
P100. However, the exercise price drops to P80 if the entity’s earnings increase by at least an average of 10%
per year over the 3 year period. The entity estimated that the fair value of the share option is P30 if the exercise
price is P80. If the exercise price is P100, the fair value of the share option is P25. During 2017 and 2018, the
earnings increased by 11% and 12%, respectively. However, during 2019, the earnings increased only by 4%.
16. What is the compensation expense for 2017?
17. What is the compensation expense for 2019?

CASE 4
On January 1, 2017, ABC established a share appreciation rights plan for the executives. The plan entitled them
to receive cash at any time during the next 4 years for the difference between the market price of the ordinary
share and a pre-established price of P20 on 60,000 share appreciation rights. On December 31, 2019, 20,000
stock appreciation rights are exercised by executives.
Market price
January 1, 2017 25 per share
December 31, 2017 28 per share
December 31, 2018 35 per share
December 31, 2019 30 per share
18. What amount of compensation expense should be recognized for 2017?
19. What amount of compensation expense should be recognized for 2018?
20. What amount should be recognized as accrued liability for share appreciation rights on December 31, 2019?

EARNINGS PER SHARE

21. Milo Co. had 600,000 ordinary shares outstanding on January 1, issued 126,000 shares on May 1,
purchased 63,000 shares of treasury shares on September 1, and issued 54,000 shares on November 1.
The weighted average shares outstanding for the year is

22. On January 1, 2016, Gridley Corporation had 125,000 shares of its P2 par value ordinary shares
outstanding. On March 1, Gridley sold an additional 250,000 shares on the open market at P20 per share.
Gridley issued a 20% share dividend on May 1. On August 1, Gridley purchased 140,000 shares and
immediately retired the shares. On November 1, 200,000 shares were sold for P25 per share. What is the
weighted-average number of shares outstanding for 2016?

23. At December 31, 2015 Rice Company had 300,000 ordinary shares and 10,000 shares of 5%, P100 par
value cumulative preference shares outstanding. No dividends were declared on either the preference or
ordinary shares in 2015 or 2016. On January 30, 2017, prior to the issuance of its financial statements for
the year ended December 31, 2016, Rice declared a 100% share dividend on its ordinary shares. Net income
for 2016 was P950,000. In its 2016 financial statements, Rice's 2016 earnings per share should be

24. At December 31, 2015 Pine Company had 200,000 ordinary shares and 10,000 shares of 4%, P100 par
value cumulative preference shares outstanding. No dividends were declared on either the preference or
ordinary shares in 2015 or 2016. On February 10, 2017, prior to the issuance of its financial statements for
the year ended December 31, 2016, Pine declared a 100% stock split on its ordinary shares. Net income for
2016 was P720,000. In its 2016 financial statements, Pine’s 2016 earnings per share should be
25. Stine Inc. had 300,000 ordinary shares issued and outstanding at December 31, 2015. On July 1, 2016 an
additional 300,000 shares were issued for cash. Stine also had share options outstanding at the beginning
and end of 2016 which allow the holders to purchase 90,000 ordinary shares at P28 per share. The average
market price of Stine’s ordinary shares was P35 during 2016. The number of shares to be used in computing
diluted earnings per share for 2016 is

26. Kasravi Co. had net income for 2016 of P300,000. The average number of shares outstanding for the period
was 200,000 shares. The average number of shares under outstanding options, at an option price of P30
per share is 12,000 shares. The average market price of the ordinary shares during the year was P36. What
should Kasravi Co. report for diluted earnings per share for the year ended 2016?

27. On January 2, 2016, Worth Co. issued at par P2,000,000 of 7% convertible bonds. Each P1,000 bond is
convertible into 20 ordinary shares. No bonds were converted during 2016. Worth had 200,000 ordinary
shares outstanding during 2016. Worth’s 2016 net income was P600,000 and the income tax rate was 30%.
Worth’s diluted earnings per share for 2016 would be (rounded to the nearest cents):

28. Beaty Inc. purchased Dunbar Co. and agreed to give shareholders of Dunbar Co. 10,000 additional shares
in 2017 if Dunbar Co.’s net income in 2016 is P500,000; in 2015 Dunbar Co.’s net income is P520,000.
Beaty Inc. has net income for 2015 of P200,000 and has an average number of ordinary shares outstanding
for 2015 of 100,000 shares. What should Beaty report as diluted earnings per share for 2015?

(USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 2 REQUIREMENTS: )


Hanson Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares, and P1,000,000 of
10% convertible bonds outstanding during 2016. The preference shares are convertible into 40,000 ordinary
shares. During 2016, Hanson paid dividends of P1.20 per share on the ordinary shares and P4 per share on the
preference shares. Each P1,000 bond is convertible into 45 ordinary shares. The net income for 2016 was
P800,000 and the income tax rate was 30%.

29. Basic earnings per share for 2016 is (rounded to the nearest cents)
30. Diluted earnings per share for 2016 is (rounded to the nearest cents)

31. At December 31, 2015, Sager Co. had 1,200,000 ordinary shares outstanding. In addition, Sager had
450,000 shares of preference shares which were convertible into 750,000 ordinary shares. During 2016,
Sager paid P600,000 ordinary cash dividends and P400,000 preference cash dividends. Net income for
2016 was P3,400,000 and the income tax rate was 40%. The diluted earnings per share for 2016 is (rounded
to the nearest cents)

(USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 2 REQUIREMENTS: )


Lerner Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares, and P1,000,000 of
10% convertible bonds outstanding during 2016. The preference shares are convertible into 40,000 ordinary
shares. During 2016, Lerner paid dividends of P.90 per ordinary share and P3.00 per preference share. Each
P1,000 bond is convertible into 45 ordinary shares. The net income for 2016 was P600,000 and the income tax
rate was 30%.
32. Basic earnings per share for 2016 is (rounded to the nearest cents)
33. Diluted earnings per share for 2016 is (rounded to the nearest cents)

34. Nolte Co. has 4,000,000 ordinary shares outstanding on December 31, 2015. An additional 200,000 shares
are issued on April 1, 2016, and 480,000 more on September 1. On October 1, Nolte issued P6,000,000 of
9% convertible bonds. The bonds are dilutive. Each P1,000 bond is convertible into 40 ordinary shares. No
bonds have been converted. The number of shares to be used in computing basic earnings per share and
diluted earnings per share on December 31, 2016 is

35. Terry Corporation had 300,000 ordinary shares outstanding at December 31, 2016. In addition, it had 90,000
share options outstanding, which had been granted to certain executives, and which gave them the right to
purchase Terry's shares at an option price of P37 per share. The average market price of Terry's ordinary
shares for 2016 was P50. What is the number of shares that should be used in computing diluted earnings
per share for the year ended December 31, 2016?

FOR THE NEXT 2 REQUIREMENTS: Information concerning the capital structure of Piper Corporation is as
follows:
December 31,
2016 2015
Ordinary Shares 150,000 shares 150,000 shares
Convertible preference shares 15,000 shares 15,000 shares
9% convertible bonds P2,400,000 P2,400,000
During 2016, Piper paid dividends of P1.20 per ordinary share and P3.00 per preference share. The preference
shares are convertible into 30,000 ordinary shares. The 9% convertible bonds are convertible into 75,000
ordinary shares. The net income for the year ended December 31, 2016, was P600,000. Assume that the income
tax rate was 30%.

36. What should be the basic earnings per share for the year ended December 31, 2016, rounded to the nearest
cents?

37. What should be the diluted earnings per share for the year ended December 31, 2016, rounded to the
nearest cents?

38. When computing diluted earnings per share, convertible securities are
A. ignored.
B. recognized only if they are dilutive.
C. recognized only if they are antidilutive.
D. recognized whether they are dilutive or antidilutive.

39. In determining diluted earnings per share, dividends on nonconvertible cumulative preference shares should
be
A. disregarded.
B. added back to net income whether declared or not.
C. deducted from net income only if declared.
D. deducted from net income whether declared or not.

40. The if-converted method of computing 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).