Other Components of Equity; Determination of Earnings Per Share and Book Value Per Share Review Questions 1.. Book value per share is the amount of owners’ equity on the company’s books
Trang 1Other Components of Equity; Determination of Earnings Per Share and Book Value Per Share
Review Questions
1 Primary source of corporate equity are the (1) investments from shareholders – ordinary and preference
3 Book value per share is the amount of owners’ equity on the company’s books for each share of its share capital
4 The four types of unrealized gains and losses shown as direct equity adjustments are
Foreign currency translation adjustment This adjustment arises from
the change in the equity of foreign subsidiaries (as measured in terms of Philippine pesos) that occurs as a result of changes in foreign currency exchange rates
Minimum pension liability adjustment This adjustment is created when
additional pension liability must be recognized
Unrealized gains and losses on available-for-sale securities
Available-for-sale securities are those that were not purchased with the immediate intention to resell but will be held for an indefinite time Unrealized gains and losses arise because these securities must be reported on the balance sheet at their fair market value
Unrealized gains and losses on derivatives Unrealized gains and losses
from market value fluctuations of derivative instruments that are intended to manage risks associated with future sales or purchases are deferred to allow for proper matching
5 Simple capital structure means that the equity capital contains only of ordinary shares and there are no potentially dilutive securities such as convertible bonds, options, etc
6 Refer to page 283 of the textbook
7 Refer to page 285 of the textbook
Trang 29 If Julie has preference share outstanding, the numerator in its computation may be incorrect A better description of “earnings per share” is “earnings
per ordinary share.” The numerator should include only the earnings
available to ordinary shareholders Therefore, the numerator should be: net income less preference dividends
The denominator is also incorrect if Julie had any ordinary share transactions during the year Since the numerator represents the results for the entire year, the denominator should reflect the weighted average number of ordinary shares outstanding during the year, not the shares outstanding at one point in time (year-end)
Exercises
Exercise 1
P1,200,000 – P250,000
= P5.00 per share 190,000
Exercise 2
Computation of net income:
2007 net income after tax P33,000,000
2007 net income before tax
[P33,000,000 (1 – 34)] 50,000,000 Add back major casualty loss 18,000,000 Income from operations 68,000,000 Income taxes (34% X P68,000,000) 23,120,000 Income before extraordinary item 44,880,000 Extraordinary item:
Casualty loss P18,000,000
Less applicable income tax reduction 6,120,000 11,880,000
Less provision for preference dividends
Trang 3Income available for ordinary 32,640,000 Ordinary shares 10,000,000
Income statement presentation
Per ordinary share:
Income before extraordinary item P4.45a
Extraordinary item (net of tax) (1.19)b
a P44,880,000 – P360,000
= P4.45
b P11,880,000
= P1.19
Exercise 3
a Net assets (equity):
8% cumulative preference shares P 200,000 Ordinary shares, P5 par, 60,000 shares issued 300,000 Additional paid-in capital 452,800
Total net assets (equity) P 806,000
b Book value per ordinary share:
Total equity (from part a) P 806,000 Less: Claims of preference shareholders (call price of
P220,000 plus dividends in arrears, P16,000) 236,000 Equity of ordinary shareholders P 570,000 Number of ordinary shares outstanding 60,000 Book value per share (P570,000 60,000 shares) P9.50
c No The book value per share represents the shareholders’ share of the net book value of the corporation’s assets, not the assets’ liquidation values The shareholders may receive more or less than the book value per share if the corporation is liquidated, depending primarily on the amounts at which the corporation’s assets are sold
Trang 4Exercise 4
EPS =
EPS = P0.50
Exercise 5
EPS =
EPS =
EPS = P1.95
Exercise 6
EPS =
EPS =
EPS = P0.50
Multiple Choice Questions
1 C
2 C
3 B
4 C
P426M – P16M P820M
P2,000,000 – P50,000 P800,000 + P200,000 P1,950,000
P1,000,000
(P114,000) – P76,000 P373,000 + (P12,000 x 7/12) P190,000
P380,000
Trang 5Test Material
Test Material 10-1
a 120,000 shares (P12,000,000 total par value, divided by P100 par value per share)
b P720,000 (120,000 shares outstanding x P6 per share)
c 2,800,000 shares (P14,000,000 total par value, divided by P5 par value per share)
d
Par value of ordinary shares issued and subscribed P14,000,000 Additional paid-in capital on ordinary shares 30,800,000 Total issue price of ordinary shares P44,800,000
Number of ordinary shares issued (part c) 2,800,000 Average issue price per share (P44,800,000
2,800,000 shares) P16
e P26,000,000 (P12,000,000 preference, P14,000,000 ordinary)
f P57,160,000 (P26,000,000 legal capital, plus P31,160,000 additional paid-in capital)
g
Total equity P59,840,000 Less: Claims of preference shareholders (120,000 shares x
P102 call price 12,240,000 Equity of ordinary shareholders P47,600,000
Number of ordinary shares outstanding (part c) 2,800,000 Book value per share (P47,600,000 2,800,000 shares) P17
Trang 6Test Material 10-2
a Par value of all preference share outstanding P2,400,000 Par value per preference share P100 Number of preference shares outstanding
b Dividend requirement per preference share
Number of preference shares outstanding (a) 24,000 Annual preference share dividend requirement
(P7.50 x 24,000 shares) P180,000
c Par value of all ordinary shares outstanding P900,000 Par value per ordinary shares P2 Number of ordinary shares outstanding (P900,000 P2
d Par value of all ordinary shares issued P 900,000 Paid-in capital in excess of par: Ordinary 8,325,000 Total issuance price of all ordinary shares P9,225,000
Number of ordinary shares issued (c) 450,000 Average issuance price per ordinary share
(P9,225,000 450,000 shares) P20.50
e Par value of preference shares P2,400,000 Par value of ordinary shares 900,000 Total legal capital P3,300,000
f Total legal capital (e) P 3,300,000 Add: Additional paid-in capital: Ordinary shares 8,325,000 Donated capital 720,000 Total paid-in capital P12,345,000
Less: Call price of preference share [24,000 shares (a) x
P105 per share] 2,520,000 Equity of ordinary shareholders P12,420,000
Number of ordinary shares outstanding (c) 450,000 Book value per share (P12,420,000 450,000 shares) P27.60
Trang 7h Retained earnings, beginning of the year P 717,500 Add: Net income for the year 3,970,000
Less: Retained earnings, end of the year 2,595,000 Total dividends paid during the year P2,092,500
Less: Dividends on preference shares (part b) 180,000 Total dividends on ordinary shares P1,912,500 Number of ordinary shares outstanding 450,000 Dividends per ordinary share
(P1,912,500 450,000) P4.25