Question

Please answer Question 1 and Question 2:

Total Marks 10

Question .1

Case-1

Ponds Corporation acquired 15% of the 300,000 ordinary shares of Dabur Company at a total cost of 15 per share on April 1, 2018. On July 1, Dabur declared and paid a $115,000 cash dividend. On December 31, Dabur reported a net income of $183,000 for the year. At December 31 the market price of Dabur was $16 per share. The investment is classified as trading.

Case-2

EMI Corporation obtained a significant influence over Jolt Corporation by buying 30 % of the Jolt’s 40,000 outstanding ordinary shares at a total cost of $ 10 per share on January 1, 2018.On June 15; Jolt declared and paid a cash dividend of $54,000.On December 31, Messi reported a net income of $125,000 for the year.

Required:

Prepare all necessary entries in 2018 for both cases.

Question. 2

On January 1,2015, Kinetic Corporation issued 10-year, $3000,000 face value, 6% bonds,                 

at par. Each $1,000 bond is convertible in to 15 ordinary shares of Kinetic.

Kinetics’ net income in 2016 was $240,000, and its tax rate was 40%. Interest expense on the   

liability component in 2016 was 210,000. The company had 100,000 ordinary shares   outstanding throughout 2015.None of the bonds were converted in 2015.

Required:

1.Compute diluted earnings per share.

2.Compute diluted earnings per share for 2015, assuming the same facts above, except that     

     $1000,000 million of 6% convertible preference shares were issued instead of the bonds.   

      Each $100 preference share is convertible to 5 ordinary shares of Kinetic.

Answer 1

Q1.	Case 1
	Journal entries in the books of Ponds Corporation
	Date	Particulars	Debit $	Credit $
	01-04-2018	Trading investments account	6,75,000
		To Bank account		6,75,000
		(45000 shares of Dabur company
		purchased for $15 per share)
	01-07-2018	Bank account	17,250
		To Dividend received account		17,250
		(Cash dividend received on trading investment
		with Dabur Company recorded)
		$115,000/300,000*45000
	31-12-2018	Trading investments account	45,000
		To Unrealized Gain on trading securities account		45,000
		(Increase in market value of shares ($16-$15) i.e.
		$1 per share recorded)

Case 2
Journal entries in the books of EMI Corporation
Date	Particulars	Debit $	Credit $
01-01-2018	Investment in Jolt Corporation account	1,20,000
	To Bank account		1,20,000
	(12,000 shares purchased at $10 per share in Jolt
	Corporation thereby obtaining significant influence)
15-06-2018	Bank account	16,200
	To Investment in Jolt Corporation account		16,200
	(Dividend received from Jolt Corp 30% of
	$54,000 reduced from investment cost)
31-12-2018	Investment in Jolt Corporation account	37,500
	To Share of profit from associate account		37,500
	(Share of profit received from Jolt Corp
	30% of $125,000)

Q2.	1. Convertible bonds
	Profit before tax	2,40,000
	Less : 40% tax	96,000
	Add : After tax amount of interest on bonds
	210,000*60%	1,26,000
	Amount available to shareholders, existing and potential (A)	2,70,000
	Number of ordinary shares	1,00,000
	Add : Shares to be issued on conversion of bonds
	3,000 bonds *15 shares per bond	45,000
	Weighted average number of shares outstanding (B)	1,45,000
	Diluted earning per share = (A) / (B) =	1.86
	1. Convertible preference shares
	Profit before tax	2,40,000
	Less : 40% tax	96,000
	Add : After tax amount of dividend on preference shares
	10,00,000*6%*60%	36,000
	Amount available to shareholders, existing and potential (A)	1,80,000
	Number of ordinary shares	1,00,000
	Add : Shares to be issued on conversion of bonds
	10,000 pref shares *5 shares per pref share	50,000
	Weighted average number of shares outstanding (B)	1,50,000
	Diluted earning per share = (A) / (B) =	1.20