PROBLEM 16.5
(a) Meng Group has a simple capital structure since it does not have any
(b) The weighted-average number of shares that Ming Group would use in
calculating earnings per share for the fiscal years ended May 31, 2019,
and May 31, 2020, is 1,600,000 and 2,200,000 respectively, calculated
as follows:
Event
Dates
Outstanding
Shares
Outstanding
Restatement
Fraction
of Year
Weighted
Shares
(c) MENG GROUP
Comparative Income Statement
For Fiscal Years Ended May 31, 2019 and 2020
2019
2020
Income from operations ……………………………………
¥1,800,000
¥2,500,000
Interest expense1 ……………………………………………..
240,000
240,000
Income taxes at 40% …………………………………………
624,000
904,000
Earnings per share:
PROBLEM 16.5 (Continued)
1Interest expense = ¥2,400,000 X .10
= ¥240,000
2Earnings per share
=
=
1,600,000
=
¥.55 per share
*Preference dividends = (No. of Shares X Par Value X Dividend %)
= (20,000 X ¥50 X .06)
= ¥60,000 per year
3Earnings per share
=
=
¥.59 per share
=
¥.16 per share
5Earnings per share
=
Net Income – Preference Dividends
Weighted-Average Ordinary Shares
=
¥996,000 – ¥60,000
2,200,000
=
¥.43
PROBLEM 16.6
(a) The number of shares used to compute basic earnings per share is
4,951,000, as calculated below.
Event
Dates
Outstanding
Shares
Outstanding
Restatement
Fraction
of Year
Weighted
Shares
Conversion of
Issued shares for
building
Aug. 1–Nov. 1
Beginning Balance,
including 5% share
(b) The number of shares used to compute diluted earnings per share is
5,791,000, as shown below.
Number of shares to compute basic earnings per
(c) The numerator in the basic earnings per share calculation for the year
ended December 31, 2020, is $10,350,000, as computed below.
After-tax net income ……………………………………. $11,550,000
PROBLEM 16.7
(a)
Basic EPS
=
£1,200,000 – (£4,000,000 X .06)
600,000*
(b)
Diluted EPS
=
(Net income – Preference dividends) +
Interest savings (net of tax)
Average ordinary shares + Potentially
dilutive ordinary shares
=
=
bThe convertible bonds are not assumed converted since conversion
would be antidilutive. That is, conversion of the bonds increases the
numerator £97,200 (£1,800,000 X .09 X .60) and the denominator 60,000
shares [(£2,000,000 ÷ £1,000) X 30 shares/bond]
PROBLEM 16.8
(a)
Weighted-Average Shares
Before Share
Dividend
After Share
Dividend
(b) AGASSI AG
Comparative Income Statement
For the Years Ended May 31, 2020 and 2019
2020
2019
Income from continuing operations before
taxes ………………………………………………………….
€1,400,000
€660,000
Discontinued operations loss,
PROBLEM 16.8 (Continued)
EPS calculations =
Net income – Preference dividends
Weighted-average ordinary shares
(c) 1. A corporation’s capital structure is regarded as simple if it
includes no potentially dilutive securities. Agassi AG has a simple
capital structure because it has not issued any convertible
securities, warrants, or share options, and there are no existing
rights or securities that are potentially dilutive to its earnings per
share.
2. A company having a complex capital structure would be required
to make a dual presentation of earnings per share; i.e., both basic
earnings per share and diluted earnings per share. This assumes
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 16.1 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to answer a variety of questions related to
CA 16.2 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to discuss the ethical issues related to an earnings–
based compensation plan.
CA 16.3 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of the proper accounting and conceptual merits
CA 16.4 (Time 25–35 minutes)
CA 16.5 (Time 25–35 minutes)
Purpose—to provide the student with an understanding of how earnings per share is affected by
CA 16.6 (Time 25–35 minutes)
Purpose—to provide the student with some familiarity with the applications dealing with earnings per
CA 16.7 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to articulate the concepts and procedures related
to antidilution. Responses are provided in a written memorandum.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 16.1
(1) Both convertible debt and debt issued with share warrants are accounted for as compound
instruments. IFRS requires that compound instruments be separated into their liability and equity
(2) Companies are not permitted to adjust compensation expense when share options become
(3) The treasury-share method is used to include options and warrants in EPS computations. The
proceeds from the assumed exercise of the options or warrants are assumed to be used to
acquire treasury shares at the market price.
(4) Companies report compensation expense for employees share purchase plans because the cost
of employee services must be measured as the services are performed. The total compensation
CA 16.2
(a) Devers recognizes that altering the estimate will benefit Adkins’ and other executive officers of
the company. Current shareholders and investors will be forced to pay out the bonuses, with the
altered estimate as a critical factor.
CA 16.3
(a) 1. The objective of issuing warrants to existing shareholders on a pro-rata basis is to raise
2. The purpose of issuing share warrants to certain key employees, usually in the form of a
non-qualified share option plan, is to increase their interest in the long-term growth and
CA 16.3 (Continued)
3. Warrants to purchase its ordinary shares may be issued to purchasers of a company’s
bonds in order to stimulate the sale of the bonds by increasing their speculative appeal and
aiding in overcoming the objection that rising price levels cause money invested for long
2. Warrants may be offered to key employees below, at, or above the market price of the
shares on the day the rights are granted except for incentive share-option plans. If a share-
option plan is to provide a strong incentive, warrants that can be exercised shortly after they
3. Income tax laws impose no restrictions on the exercise price of warrants issued to
purchasers of a company’s bonds. The exercise price may be above, equal to, or below the
current market price of the company’s shares. The longer the period of time during which
(c) 1. Financial statement information concerning outstanding share warrants issued to a
2. Financial statement information concerning share warrants issued to key employees should
include the following: status of these plans at the end of each period presented, including
3. Financial statement disclosure of outstanding share warrants that have been issued to
purchasers of a company’s bonds should include the prices at which they can be exercised,
CA 16.4
(a) Generally, the requirements indicate that employee share options be treated like all other types of
compensation and that their value be included in financial statements as part of the cost of
employee services. This requires that all types of share options be recognized as compensation
(b) According to Ciesielski’s commentary, the bill in the U.S. Congress would only record expense
for the options granted to the top five executives. They also are recommending that the SEC
(c) Here is an excerpt from a presentation given by Dennis Beresford (former FASB chair) on the
concept of neutrality, which says it well.
The FASB often hears that it should take a broader view, that it must consider the economic
There is a common element in those assertions. The goals are desirable but the means require
that the Board abandon neutrality and establish reporting standards that conceal the financial
impact of certain transactions from those who use financial statements. Costs of transactions
exist whether or not the FASB mandates their recognition in financial statements. For example,
CA 16.4 (Continued)
Neutrality does not mean that accounting should not influence human behavior. We expect that
changes in financial reporting will have economic consequences, just as economic
consequences are inherent in existing financial reporting practices. Changes in behavior naturally
follow from more complete and representationally faithful financial statements. The fundamental
question, however, is whether those who measure and report on economic events should
somehow screen the information before reporting it to achieve some objective. In FASB
Concepts Statement No. 8, Chapter 2 Qualitative Characteristics of Accounting Information, the
Board observed:
Indeed, most people are repelled by the notion that some “big brother,” whether
CA 16.5
(a) Dividends on outstanding preference shares must be subtracted from net income or added to net
loss for the period before computing EPS on the ordinary shares. This generalization will be
modified by the various features and different requirements preference shares may have with
respect to dividends. Thus, if preference shares are cumulative, it is necessary to subtract their current
(b) When options and warrants to buy ordinary shares are outstanding and their exercise price (i.e.,
proceeds the corporation would derive from issuance of ordinary shares pursuant to the warrants
(c) In arriving at the calculation of diluted EPS where convertible debentures are assumed to be
converted, their interest (net of tax) is added back to net income in the numerator element of the
CA 16.6
(a) Earnings per share, as it applies to a corporation with a capitalization structure composed of only
(b) Treatments to be given to the listed items in computing earnings per share are:
1. Outstanding preference shares with a par value liquidation right issued at a premium,
2. The exercise of an ordinary share option results in an increase in the number of shares
outstanding, and the computation of earnings per share should be based on the weighted–
3. The replacement of a machine immediately prior to the close of the current fiscal year will
4. Dividends declared on preference shares should be deducted from income from continuing
5. Acquiring treasury shares will reduce the weighted-average number of shares outstanding
used in the EPS denominator.
6. When the number of ordinary shares outstanding increases as a result of a 2-for-1 share
7. The existence of a provision for a contingent liability on a possible lawsuit created out of
retained earnings will not affect the computation of earnings per share since the