PART I- Theory

1. An entity has not declared or paid dividends on its cumulative preference shares in the last three years. The
dividends in arrears shall be reported
a. In a note to the financial statements
b. As a reduction in SHE
c. As a current liability
d. A a noncurrent liability
2. Which of the following features of preference share would most likely be opposed by ordinary shareholders?
a. Convertible b. Callable c. Redeemable d. Participating
3. It is the amount which the preference shareholders normally receive upon liquidation of the entity
a. Liquidation value c. Book value
b. Par value or Stated value d. Fair value
4. In the absence of liquidation value, the preference shareholders shall receive what amount in the event of
liquidation?
a. Liquidation value c. Book value
b. Par value or Stated value d. Fair value
5. When the right to received dividend is forfeited in any one year in which dividend is not declared, the
preference share is said to be
a. Cumulative b. Noncumulative c. Participating d. Nonparticipating
6. Younger Company has outstanding both common stock and nonparticipating, non-cumulative preferred
stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common
stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the market price of
the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when the market
price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.
7. Assume common stock is the only class of stock outstanding in the Manley Corporation. Total stockholders'
equity divided by the number of common stock shares outstanding is called
a. book value per share. c. par value per share.
b. stated value per share. d. fair value per share.
8. With respect to the computation of earnings per share, which of the following would be most indicative of a
simple capital structure?
a. Common stock, preferred stock, and convertible securities outstanding in lots of even thousands
b. Earnings derived from one primary line of business
c. Ownership interest consisting solely of common stock
d. None of these
9. In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount
that should be deducted as an adjustment to the numerator (earnings) is the
a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. none of these.
10. In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the
additional shares are
a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.
11. What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share,
respectively?
a. Decrease and no effect
b. Increase and no effect
c. Decrease and increase
d. Increase and decrease
12. Due to the importance of earnings per share information, it is required to be reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes
13. A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had
been converted into common stock, if the effect of its inclusion is
Dilutive Antidilutive
a. Yes Yes
 b. Yes No
c. No Yes
d. No No
14. When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.
15. Dilutive convertible securities must be used in the computation of
a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. none of these.
16. In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as
an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which
amount should then be added as an adjustment to the numerator (net earnings)?
a. Annual preferred dividend
b. Annual preferred dividend times (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate
17. In the diluted earnings per share computation, the treasury stock method is used for options and warrants to
reflect assumed reacquisition of common stock at the average market price during the period. If the exercise
price of the options or warrants exceeds the average market price, the computation would
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
c. reflect the excess of the number of shares assumed issued over the number of shares assumed
reacquired as the potential dilution of earnings per share.
d. be antidilutive.
18. In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the
proceeds assumed to be received upon exercise of the options and warrants
a. are used to calculate the number of common shares repurchased at the average market price, when
computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings per share.
c. are disregarded in the computation of earnings per share if the exercise price of the options and
warrants is less than the ending market price of common stock.
d. none of these.
19. Antidilutive securities
a. should be included in the computation of diluted earnings per share but not basic earnings per share.
b. are those whose inclusion in earnings per share computations would cause basic earnings per share
to exceed diluted earnings per share.
c. include stock options and warrants whose exercise price is less than the average market price of
common stock.
d. should be ignored in all earnings per share calculations.
20. Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings
per share is the security with the
a. greater earnings adjustment.
b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.

PART II- Problems

All preference dividends have been fully paid. Compute the book value per share of ordinary shares.
22. The shareholder equity of DEF Co. shows the following balances:
10% Preference SC, 5,000 shares, P100 par 500,000
12% Preference SC, 6,000 shares, P 100 par 600,000
Ordinary SC, 10,000 shares, P 40 par 400,000
Share premium 320,000
Retained earnings 480,000

The 10% preference shares is cumulative and fully participating, while the 12% preference share is non-
cumulative and fully participating. The last payment of dividends was 2 years ago. Compute the book value
per share of ordinary shares.

23. Goodness corporation has an authorized capital of 10,000 shares of P100 par 8% cumulative preference share
and 20,000 shares of P100 par ordinary share. The equity account balances at year end totaled P 1,910,000
broken down as follows:
Cumulative Preference SC 500,000
Ordinary SC 1,100,000
Share premium 200,000
Retained earnings 260,000
Treasury shares, ordinary (1,000 sh at cost) (150,000)

Dividends on preference shares are in arrears are in 2 years. Compute the book value per share of ordinary
shares.
24. INRI Corporation has the following capital structure at January 1, 2019:
Ordinary SC, P10 par 800,000 shares
Liability component of 5 years, 10% convertible
Bonds, each 1,000 convertible
to 80 shares 5,162,550
Share premium- conversion option 205,000
The bonds were issued on January 2, 2015 and at the time of the issue it was selling at a rate of interest of 9%
without conversion option.

During 2019, the company had the following transactions:

25. XYZ Co. has reported the following information as of December 31, 2019:
Net income after tax P 20,000,000
Ordinary shares outstanding
through-out the year 10,000,000

Mixture Company has 3,000,000 outstanding put option shares with an exercise price of P 3.50 per share. The
average market price of its ordinary shares at the end of the year is P 2.80
Compute the basic earnings per share and diluted earnings per share.