Question

In: Accounting

On January 1, 2X16, Manila Co. has 100,000 outstanding ordinary shares. During the year, Manila Co....

On January 1, 2X16, Manila Co. has 100,000 outstanding ordinary shares. During the year, Manila Co. reported a net income of P5,000,000. The income tax rate is 30%. Besides, Manila Co. has 4,000, 10% convertible bonds with 1,000 face amount. Each bond is convertible into five (5) ordinary shares.

Required: Solve for the following:

1. Determine the amount of basic earnings per share for the year.

2. Determine the amount of diluted earnings per share under each of the following scenarios.

a. Bonds were issued on January 1, 2X16, and there were no conversions made during the year.

b. Bonds were issued on April 1, 2X16, and there were no conversions made during the year.

c. Bonds were issued in the previous year and were converted on October 1, 2X16.

Solutions

Expert Solution

Answer:

1. The amount of basic earnings per share for the year is P50

2.

a. The amount of diluted earnings per share is $41.67

b. The amount of diluted earnings per share is $43.48

c. The amount of diluted earnings per share is $47.62

.

Explanation:

Earning per share

Earning per share is the net earning per share for the period available for equity shareholders only.

.

Diluted Earning per share

Diluted Earning per share is the net earning per share for the period available for equity shareholders only assuming that all the convertible securities are converted, it means the earning per share is diluted.

.

Calculate the Share to be converted as a result of conversion of bond

Formula

Share to be converted = Numbers of bonds x Conversion rate

Share to be converted = 4,000 bonds x 5 shares per bond = 20,000 shares

.

1.

Step 1:

First Determine the formula f Basic earning per share

Basic Earning per share = Net Income / Numbers of Outstanding shares

.

Step 2:

Place the values to calculate the basic earning per share

Basic Earning per share = P5,000,000 / 100,000 shares

Basic Earning per share = P50 per share

.

2.

Determine the formula to calculate the weighted average numbers of shares and Diluted earning per share

Weighted average numbers of shares = Numbers of outstanding share at the beginning of year + ( Bonds issued x Numbers of months after issuance in a year / 12 months

Calculate the Diluted earning per share as follow

Diluted Earning per share = Net income / Weighted average Diluted / outstanding numbers of shares

.

a.

Step 1:

Calculate the Weighted average Diluted numbers of shares

Weighted average Diluted numbers of shares = 100,000 share x 20,000 shares x 12/12

Weighted average Diluted numbers of shares = 120,000 shares

.

Step 2:

Now calculate Diluted Earning per share

Diluted Earning per share = P5,000,000 / 120,000

Diluted Earning per share = $41.67

.

b.

Step 1:

Calculate the Weighted average Diluted numbers of shares

Weighted average Diluted numbers of shares = 100,000 share x 20,000 shares x 9/12

Weighted average Diluted numbers of shares = 115,000 shares

.

Step 2:

Now calculate Diluted Earning per share

Diluted Earning per share = P5,000,000 / 115,000 = $43.48

.

c.

Step 1:

Weighted average outstanding numbers of shares = 100,000 share x 20,000 shares x 3/12

Weighted average outstanding numbers of shares = 105,000 shares

.

Step 2

Now calculate Diluted Earning per share

Diluted Earning per share = P5,000,000 / 105,000

Diluted Earning per share = $47.62

ekkarill92 answered 1 year ago
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