Reference no: EM132962960

JKL is a listed entity preparing financial statements to 31 August. At 1 September 2018, JKL had 6,000,000 50cents shares in issue. On 1 February 2019, the entity made a rights issue of 1 for 4 at 125cents per share; the issue was successful and all rights were taken up. The market price of one share immediately prior to the issue was 145cents per share. Earnings after tax for the year ended 31 August 2019 were shs. 2,763,000.

Several years ago, JKL issued a convertible loan of shs. 2,000,000. The loan carries an interest rate of 7% and its terms of conversion (which are at the option of the stockholder) are as follows:

For each shs. 100 of loan inventory:

Conversion at 31 August 2023 105 shares
Conversion at 31 August 2024 103 shares
JKL is subject to an income tax rate of 35%.

Required:

Problem (a) Using basic earnings per share and diluted earnings per share for the year ended 31 August 2019, advise the investors on the financial performance of the company

Problem (b) The IASC Framework for the preparation and presentation of financial statements states that the objective of financial statements is to provide information that is "useful to a wide range of users in making economic decisions". Explain to a holder of ordinary shares in JKL both the usefulness and limitations of the diluted earnings per share figure.