Reference no: EM131814986
Q1- An excerpt from the statement of financial position of Earl Limited follows:
EARL LIMITED Selected Statement of Financial Position Information At December 31, 2014
Long-term debt
Notes payable, 10% $2,000,000
4% convertible bonds payable $3,000,000
6% convertible bonds payable $4,000,000
Total long-term debt $9,000,000
Shareholders' equity
$0.80 cumulative, no par value, convertible preferred shares $4,000,000
(unlimited number of shares authorized, 280,000 shares issued and outstanding)
Common shares, no par value 18,000,000
(5,000,000 shares authorized, 1,800,000 shares issued and outstanding)
Contributed surplus 100,000
Retained earnings 5,000,000
Total shareholders' equity $27,100,000
Notes and Assumptions
December 31, 2014
1. Options were granted/written in 2013 that give the holder the right to purchase 50,000 common shares at $12 per share. The average market price of the company's common shares during 2014 was $18 per share. The options expire in 2022 and no options were exercised in 2014.
2. The 4% bonds were issued in 2013 at face value. The 6% convertible bonds were issued on July 1, 2014, at face value. Each convertible bond is convertible into 80 common shares (each bond has a face value of $1,000).
3. The convertible preferred shares were issued at the beginning of 2014. Each share of preferred is convertible into one common share.
4. The average income tax rate is 31%.
5. The common shares were outstanding during the entire year.
6. Preferred dividends were not declared in 2014.
7. Net income was $1,750,000 in 2014. 8. No bonds or preferred shares were converted during 2014.
Instructions
(a) Calculate basic earnings per share for 2014.
(b) Calculate diluted earnings per share for 2014. For simplicity, ignore the requirement to record the debt and equity components of the bonds separately.
(c) From the perspective of a common shareholder, provide support for the treatment of the preferred dividends in calculating Earl Limited's basic and diluted earnings per share.
(d) Discuss how a potential shareholder's investment decision may be affected if diluted earnings per share was not reported.
Q2- The following information is available for Dylan Inc., a company whose shares are traded on the Toronto Stock Exchange:
Net income $150,000
Average market price of common shares during 2014 (adjusted for stock dividend) $20
December 31, 2014 (fiscal year end) market price of common shares $20
Income tax rate for fiscal year 2014 30%
Transactions in common shares during 2014: Change:
Cumulative shares
Jan. 1, 2014, common shares outstanding 90,000
Mar. 1, 2014, issuance of common shares 30,000 120,000
June 1, 2014, 10% stock dividend 12,000 132,000
Nov. 1, 2014, repurchase of common shares (30,000) 102,000
Other information:
1. For all of the fiscal year 2014, $100,000 of 6% cumulative convertible bonds have been outstanding. The bonds were issued at par and are convertible into a total of 10,000 common shares (adjusted for the stock dividend) at the option of the holder, and at any time after issuance.
2. Stock options for 20,000 common shares have been outstanding for the entire 2014 fiscal year, and are exercisable at the option price of $25 per share (adjusted for the stock dividend).
3. For all of the fiscal year 2014, $100,000 of 4% cumulative convertible preferred shares have been outstanding. The preferred shares are convertible into a total of 15,000 common shares (adjusted for the stock dividend) at the option of the holder, and at any time after January 2019.
Instructions
(a) Determine the weighted average number of common shares that would be used in calculating earnings per share for the year ending December 31, 2014.
(b) Calculate basic earnings per share for 2014.
(c) Determine the potential for dilution for each security that is convertible into common shares.
(d) Calculate diluted earnings per share for 2014. For simplicity, ignore the requirement to record the debt and equity components of the bonds separately.