Solution manual financial accounting by valix ch10 11

Book value per share 68 Excess Preference Ordinary... Preference share capital 100,000Retained earnings appropriated Less: Preference shareholders’ equity:... Share capital Fraction Allo

173 CHAPTER 10

Problem 10-1

Problem 10-2

Excess Preference Ordinary

Book value per share 128

168

174

Excess Preference Ordinary

Book value per share 68

Excess Preference Ordinary

over par Preference Preference Ordinary

Preference Ordinary Shares Amount Shares

1 Preference share capital 100,000

Retained earnings appropriated

Less: Preference shareholders’ equity:

Book value per share:

Preference (1,160,000 / 10,000 shares)

116

Ordinary (2,660,000 / 20,000 shares)

133

Less: Treasury shares

Less: Preference dividends paid in 2008

Preference shareholders’ equity:

Preference shareholders’ equity:

Preference dividends for 2000 (1,000,000 x 8%) 80,000

Preference shareholders’ equity:

1,050,000

Ordinary shareholders’ equity

Preference shareholders’ equity:

Less: Treasury shares

Preference dividends in arrears – December 31, 2008

200,000

A dividend is not a liability until it is legally declared Accordingly, the

preference dividends in arrears of P200,000 on December 31, 2008 shall bedisclosed only

Problem 10-18 Answer C

Dividend Preference Ordinary

Preference shareholders’ equity:

Preference share capital (500 x P1,000) 500,000

700,000

Ordinary shareholders’ equity

2,900,000

181

Problem 10-20 Answer A

Ordinary share capital 3,000,000Retained earnings – 2008 net income

6,000,000

Preference shareholders’ equity:

Problem 10-21 Answer A

Liquidation premium – excess of liquidating value over par (20,000 x 5)

Share capital Fraction Allocation

182Problem 10-23 Answer C

Preference shareholders’ equity:

Preference dividend for 2006, 2007, 2008

2,600,000

Ordinary shareholders’ equity

8,000,000

For book value purposes, the subscription receivable is not deducted from

subscribed share capital in determining the total shareholders’ equity

Ordinary shares subscribed

20,000

Book value per ordinary share (8,000,000 / 50,000)

160

Problem 10-24 Answer C

Dividends Preference Ordinary

Total loss 2004, 2005 and 2006

Before participation, one year dividend is paid to ordinary share capital using

the participating preference rate The balance for participation is disturbed

on a prorata basis as follows:

Amount Fraction Allocation

184 CHAPTER 11

1 Basic earnings per share:

Income from continuing operations (3,400,000 / 50,000) 68Loss from discontinued operations (600,000 / 50,000)

(12)

2 Basic earnings per share:

Less: Preference dividend (10% x 2,000,000)

200,000

Income to ordinary share 3,200,000Income from continuing operations (3,200,000 / 50,000) 64Loss from discontinued operations

Basic earnings per share:

Income from continuing operations (3,645,000 / 135,000)

Assumed issued ordinary shares through bond conversion

Assumed issued ordinary shares through conversion of

60,000

Total ordinary shares 190,000

Both the BP and PS are potentially dilutive because the incremental EPS is very

much lower than the basic EPS

Assumed issued ordinary shares through bond conversion

Assumed issued ordinary shares through bond conversion

(2,000 x 10 = 20,000 x 9/12)

15,000

Add: Interest on bonds (12% x 2,000,000 x 9/12) 180,000

Ordinary shares issued through actual bond conversion (3,000 x 20)

60,000

Assumed ordinary shares issued through conversion of remaining

bonds (1,000 x 20)

20,000

Since the bonds are outstanding on January 1, 2008, the ordinary sharesissued through the actual bond conversion are considered outstanding fromJanuary 1, 2008

1 Basic EPS (7,500,000 / 200,000)

37.50

Ordinary shares actually outstanding

200,000 Incremental ordinary shares:

Less: Assumed treasury shares (3,000,000 / 75) 40,000

10,000 Total ordinary shares

Less: Assumed treasury shares (3,200,000 / 250)

12,800 Incremental ordinary shares

7,200 Multiply by (9 months)

9/12

Problem 11-16

1 January 1 Beginning balance 100,000

65,000

Proceeds from assumed exercise of options (30,000 x 25) 750,000

Warrants to purchase 20,000 ordinary shares – antidilutive

because the exercise price is higher than the average

Shares issued through exercise of rights 120,000

April 1 – new branch 50,000

December 31 – net income in excess of P5,000,000 (900 x 1,000) 900,000

Problem 11-21 Answer A

Average shares 980,250

194Question 2 Answer A

Problem 11-31 Answer B

Ordinary shares issued through exercise of rights (100,000 / 4) 25,000

Theoretical value of share ex-right (4,240,000 / 125,000) 34

Ordinary shares issued through exercise of rights (100,000 / 5) 20,000

Theoretical value of share ex-right (1,800,000 / 120,000) 15

Market value of share ex-right 150

January 1 600,000 x 35/50 x 9/12 525,000

Ordinary shares to be issued in the acquisition of subsidiary 50,000

Net income to ordinary share

3,200,000

Diluted earnings per share (3,200,000 / 1,250,000) 2.56

Problem 11-37 Answer B

Ordinary shares to be issued for conversion of preference (20,000 x 5)

Preference dividend (5% x 1,000,000) ( 50,000)

Ordinary shares actually outstanding

Add: Interest on bonds (2,000,000 x 7% x 6/12) 70,000

The issuance of ordinary shares on October 1 is not “averaged” anymore because the convertible bonds are outstanding on January 1

The after-tax actual interest paid on the bonds up to the date of conversion is

added back to net income

200Problem 11-43

Ordinary shares issued on July 1 (50,000 x 6/12) 25,000

( 30,000)

201Problem 11-45 Answer A

Exercise of share options on April 1 (40,000 x 9/12) 30,000

Average number of shares

Note that the share price of P16 on exercise date on April 1 is used in

computing the assumed treasury shares

30,000

Potential shares from January 1 to April 1 (15,000 x 3/12) 3,750

Average number of shares

Problem 11-49 Answer C

7,000,000

It is assumed that sufficient number of ordinary shares shall be issued at the

average market price to cover the amount of P7,000,000.

Ordinary shares assumed to be issued (7,000,000 / P280) 25,000

Ordinary shares to be reacquired under the written put options 20,000

203

Problem 11-50 Answer A

( 8)

The effect of the possible exercise of ordinary share options is ignored because

it increases earnings per share and therefore it is antidilutive

Problem 11-51 Answer A

The maximum amount of earnings per share is equal to the basic earnings per

share On the other hand the minimum amount is equal to the diluted earnings per share computed as follows:

Effect of possible conversion of preference share ( 1)Effect of possible exercise of ordinary share warrants ( 2)