ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 43  May 2022 CPA Licensure Examination  Week No. 18

FINANCIAL ACCOUNTING & REPORTING C. UBERITA  J. BINALUYO  G. MACARIOLA

FAR-4320: BOOK VALUE PER SHARE & EARNINGS PER SHARE

PROBLEM SOLVING

PROBLEM 1: JCHAN71954 Corporation’s December 31, 2022 balance sheet reports the following shareholders’
equity:
8% Cumulative Preference share capital, P100 par value per share,
10,000 shares issued and outstanding P1,000,000
Ordinary share capital, P100 par value, 50,000 shares issued & outstanding 5,000,000
Share premium reserve 600,000
Retained Earnings 1,500,000

The last payment of dividend on preference was on December 31, 2019. If JCHAN71954 is to be liquidated,
the preference shareholders would receive par value plus a premium of P10 per share.

What is the book value per share on ordinary share?

a. P133.60 c. P136.80
b. P135.20 d. P137.20

PROBLEM 2: GGADOT301985 Corporation’s December 31, 2022 balance sheet reports the following
shareholders’ equity:
10% Cumulative Preference share capital, P100 par value per share, 15,000 shares
issued and outstanding P1,500,000
Ordinary share capital, P100 par value, 50,000 shares issued 5,000,000
Share premium reserve 600,000
Treasury Stock, (ordinary) 5,000 shares at cost 650,000
Retained Earnings 2,100,000

The last payment of dividend on preference was in December 31, 2020. If GGADOT301985 is to be liquidated,
the preference shareholders would receive par value plus a premium of P10 per share.

Question 1: What is the book value per share on ordinary share?

a. P132.00 c. P146.67
b. P133.00 d. P147.70

Question 2: If the preference share is participating, what is the book value per share on ordinary
share?
a. P126.00 c. P140.00
b. P137.50 d. P146.00

PROBLEM 3: The shareholders’ equity of KSTEWART91990 Company shows the following balances on December
31, 2022:
10% Preference share capital, cumulative and nonparticipating,
P100 par with a liquidation value of P110, 20,000 shares P2,000,000
Ordinary share capital, P100 par, 30,000 shares 3,000,000
Subscribed ordinary shares 1,000,000
Subscription receivable 600,000
Treasury stock, 5,000 shares, at cost, (ordinary) 400,000
Share premium reserve 660,000
Retained earnings 1,360,000

What is the book value per share of ordinary share, assuming preference dividends are in arrears
since 2019?
a. P115.50 c. P154.00
b. P132.00 d. P184.80

PROBLEM 4: On January 1, 2022, JMCAVOY211979 Corporation, whose stock is publicly traded had 200,000
shares of ordinary shares issued and outstanding. On April 1, 2022, the company issued 10% stock dividends.
On October 1, 2022, additional 20,000 shares were issued for cash and on November 1, 2022, the shares
were split on a 2 for 1 basis.

What is the number of shares to be used in computing earnings per share on December 31, 2022?
a. 440,000 c. 460,000
b. 450,000 d. 480,000

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4320
Week 18: BOOK VALUE PER SHARE & EARNINGS PER SHARE

PROBLEM 5: EWATSON151990 Company had 120,000 shares of ordinary share issued and outstanding at January
1, 2022. On January 2, 2022, the company issued 80,000 shares of preferred stock. During the year, the
company declared and paid P420,000 cash dividend on the ordinary and P240,000 on the preference. Net
income for the year was P1,500,000.

What should be the basic earnings per share in 2022?

a. P 9.50 c. P12.50
b. P10.50 d. P15.75

PROBLEM 6: PRUDD61969 Company has 200,000 shares of ordinary shares outstanding on January 1, 2022. On
March 31, 2022, 100,000 shares of 10% convertible preference share par value of P10 were issued, the preference
shares are convertible into 50,000 shares of ordinary shares. On December 31, 2022, PRUDD61969 Company
reported a net income of P1,140,000 and paid dividends of P300,000 to ordinary and P100,000 to preference
shareholders.

What is the diluted earnings per share?

a. P4,38 c. P4.80
b. P4.56 d. P5.07

PROBLEM 7: CTATUM261980 Company has 200,000 shares of ordinary share on January 1, 2022. On August 31,
2022, 9% convertible P2,000,000 face value (equal to its liability component) bonds were issued. Each 1,000
bonds are convertible into 45 ordinary shares. Net income after income tax of P1,684,200 was reported by
CTATUM261980 for the entire year. Income tax rate is 32%

What is the diluted earnings per share?

a. P7.32 c. P7.85
b. P7.50 d. P8.42

PROBLEM 8: On January 1, 2022, RDOWNEYJR41965 Company had 50,000 shares of ordinary share outstanding
that did not change during 2021 and 2022. RDOWNNEYJR41965 Company granted options to certain executives
to purchase 9,000 shares of its ordinary share at P70 each. The average market price of ordinary share was P105
per share during 2022. Net income for the year is P500,000.

Question 1: What is the basic earnings per share?

a. P8.47 c. P9.43
b. P10.00 d. P8.93

Question 2: What is the diluted earnings per share?

a. P8.47 c. P9.43
b. P10.00 d. P8.93

THEORIES

1. Earnings per share should be computed based on

a. Number of ordinary shares outstanding at the beginning of the year.
b. Number of ordinary shares outstanding at the end of the year.
c. Weighted average number of ordinary shares outstanding during the year.
d. Weighted average number or ordinary and preference shares outstanding during the year.

2. What is the proper treatment of dividends on noncumulative preference shares in the

calculation of earnings per share?
a. Deducted from net income, when declared only
b. Deducted from net income whether declared or not
c. Added to net income, when declared only
d. Added to net income whether declared or not

3. The following are examples of potential ordinary shares, except

a. Convertible preference shares
b. Convertible bonds
c. Stock options
d. Stock dividends

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4320
Week 18: BOOK VALUE PER SHARE & EARNINGS PER SHARE

4. In computing the basic EPS, the numerator used is the

a. Income before interests and taxes
b. Income available to ordinary shares
c. Income available to ordinary and preference shares
d. Income after interest and taxes but before preference dividends

5. In the computation of diluted earnings per share, interest expense on convertible

bonds should be
a. Added back to net income at the gross amount
b. Added back to net income net of tax
c. Deducted from net income net of tax
d. Ignored

6. In computing the earnings per ordinary share, noncumulative preference dividends

not declared should be
a. Deducted from net income for the year
b. Added to the net income for the year
c. Deducted from net income for the year, net of tax
d. Ignored

7. In calculating earnings per share, which of the following should not be considered?
a. The weighted average number of ordinary shares outstanding
b. The amount of dividends declared on cumulative preference shares
c. The amount of cash dividends declared on ordinary shares
d. The number of ordinary shares resulting from the assumed conversion of bonds
outstanding.

8. When computing diluted earnings per share, stock options are

a. Recognized only if they are dilutive
b. Recognized only if they are antidilutive
c. Recognized only if they were exercised
d. Ignored

9. When applying the treasury share method for diluted earnings per share, the market
price of the ordinary shares used for the repurchase is the
a. Price at the end of the year.
b. Average market price
c. Price at the beginning of the year
d. None of these

10.In the diluted earnings per share computation, when the exercise price of the options
or warrants exceeds the average 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

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