Question 1

Under IAS 33 an entity is not required to disclose earnings per share where a loss has been made for the period.

Accepted Answer

A) True 
 B)False  False

Question 2

Dormant Plc has a net income after tax of £2 540 000 for the year ended 30 June 2015.At the beginning of the period Dormant Plc had 3 000 000 fully paid-up ordinary shares on issue.On 1 November 2014,Dormant Plc makes a rights issue of 1 fully paid share for every 6 shares held.The required payment for the rights issue shares was £2.00.The last cum rights price was £3.00.What are the basic earnings per share for the period ended 30 June 2015 in accordance with IAS 33?

Accepted Answer

A)  £0.73
B)  £0.75
C)  £0.76
D)  £0.78 A

Question 3

The effect of a bonus issue on the market value of an entity's equity is:

Accepted Answer

A)  The number of shares is increased, meaning that each shareholder benefits from the conversion of retained earnings into additional shares.Each shareholder benefits proportionately equally, however, so their relative positions remain the same.
B)  The total equity of the entity remains the same, apart from the reclassification of reserves used to make the bonus issue.Each shareholder benefits from the ability to sell off the additional shares provided, so the market value of the entity remains the same.
C)  The market price is observed to drop as a result of the increased supply of shares for sale because shareholders often respond to a bonus issue by selling off the 'windfall' shares.
D)  Theoretically it should have no effect, but empirical evidence suggests that a bonus issue is used to signal an increase in dividends, so the total market value of the entity does sometimes increase. D

Question 4

Describe how the calculation of a basic EPS will be affected by a bonus issue that is in accordance with IAS 33 Earnings per Share.

Accepted Answer

The answer of Describe how the calculation of a basic...

Question 5

To maximise dilution of basic EPS,dilutive potential ordinary shares with the highest 'earnings per incremental share' are included in the diluted earnings per share calculation before those with a lower 'earnings per incremental share'.

Accepted Answer

A) True 
 B)False

Question 6

Nogales Ltd is planning to raise $100 million to finance its research and development program in the lucrative biotechnology division of the company.The company's internal forecasts for the year ended 30 June 2014 for selected accounts follow: $$\begin{array} { | l | l | } 
\hline \text { Total liabilities } & \$ 250 \text { million } \
\hline \text { Total shareholders' equity } & \$ 150 \text { million } \
\hline \text { Net income after tax } & \$ 10 \text { million } \
\hline
\end{array}$$ There are 10 000 000 ordinary shares on issue.The entity has a debt covenant that debt-to-equity ratio be kept at less than two. Three alternatives for funding the projects were considered by the board of directors:
Issue of ordinary shares equivalent to $100 million (equivalent to 5 million ordinary shares)
Issue of 10%,10-year non-convertible notes
Issue of 6%,preference shares (redeemable on 30 June 2024)
Which of the following statements made by a director is correct with respect to the three funding alternatives?

Accepted Answer

A)  The 10-year non-convertible notes issue will have no dilution effect and no impact on the company's debt covenant.
B)  Earnings per share will decline by one third with the issue of ordinary shares.
C)  The issue of preference shares will have no dilution effect and no impact on the company's debt covenant.
D)  Earnings per share will decline by one third with the issue of ordinary shares and the issue of preference shares will have no dilution effect and no impact on the company's debt covenant.

Question 7

Sedona Plc historically makes a profit and would like to reward its shareholders by declaring a bonus issue next year but is not sure what effects it may have on the company's basic and diluted EPS.As accountant to Sedona Plc which advice do you think would best describe the effects of a bonus issue?

Accepted Answer

A)     Basic EPS  Diluted EPS  No effect  No effect \begin{array} { | l | l | } \hline 	ext { Basic EPS } & 	ext { Diluted EPS } \\hline 	ext { No effect } & 	ext { No effect } \\hline\end{array} Basic EPS  No effect ​ Diluted EPS  No effect ​​ 
B)     Basic EPS  Diluted EPS  Decrease  Decrease \begin{array} { | l | l | } \hline 	ext { Basic EPS } & 	ext { Diluted EPS } \\hline 	ext { Decrease } & 	ext { Decrease } \\hline\end{array} Basic EPS  Decrease ​ Diluted EPS  Decrease ​​ 
C)     Basic EPS  Diluted EPS  Decrease  No effect \begin{array} { | l | l | } \hline 	ext { Basic EPS } & 	ext { Diluted EPS } \\hline 	ext { Decrease } & 	ext { No effect } \\hline\end{array} Basic EPS  Decrease ​ Diluted EPS  No effect ​​ 
D)     Basic EPS  Diluted EPS  Increase  Increase \begin{array} { | l | l | } \hline 	ext { Basic EPS } & 	ext { Diluted EPS } \\hline 	ext { Increase } & 	ext { Increase } \\hline\end{array} Basic EPS  Increase ​ Diluted EPS  Increase ​​

Question 8

Gimlet Plc has earnings after tax of £930 000 for the year ended 30 June 2015.At the beginning of the period Gimlet had 250 000 fully paid-up ordinary shares on issue.On 30 December 2014 the company made a one-for-six bonus issue.The last sale price of the shares immediately prior to the bonus issue was £1.35 each.What are the earnings per share taking into account the bonus issue?

Accepted Answer

A)  £3.72
B)  £4.13
C)  £4.34
D)  £3.19

Question 9

The requirement to apply IAS 33's definition of earnings and its definition of the number of shares means that the earnings per share figures for companies can be easily compared as they are not subject to the professional judgment involved in other areas of accounting.

Accepted Answer

A) True 
 B)False

Question 10

IAS 33 requires a bonus issue made during a period to be treated by:

Accepted Answer

A)  removing the effect of the bonus issue by deflating the number of shares to the equivalent of the weighted-average number of ordinary shares that would have been on issue in the period if the bonus issue had not taken place.
B)  no adjustment required; the calculation of the weighted-average number of shares issued during the period automatically takes into account the effect of issuing more shares.
C)  increasing the number of shares issued before the bonus issue as if the bonus issue had been made at the beginning of the period.Previous period's earnings per share reported for comparative purposes should also be adjusted for the effect of the bonus issue.
D)  calculating the earnings per share both by deflating the number of shares issued to pre-bonus issue numbers so that the earnings per share may be compared to previous periods and also calculating the 'post-bonus issue' earnings per share as a basis for continuing comparison in future periods.

Question 11

Phlox Plc has a profit after tax of £6 590 000 for the period ended 30 June 2015.Phlox Plc also has £1 000 000 of 6% cumulative preference shares.The dividends on the preference shares are not treated as expenses in the statement of comprehensive income. As at 1 July 2014 there were 3 000 000 fully paid ordinary shares issued.Phlox Plc also has £1 500 000 in convertible debentures issued for the full year.It pays interest of 5% per annum and could be converted to 300 000 ordinary shares at the option of the debenture-holders.There are also 100 000 share options currently on issue with an exercise price of £1.30.The average market price for ordinary shares during the year was £2.70.The tax rate is 33%.What are the diluted earnings per share for Phlox Plc in accordance with IAS 33?

Accepted Answer

A)  £1.92
B)  £1.95
C)  £1.97
D)  £2.20

Question 12

In order to determine whether or not potential ordinary shares are dilutive,IAS 33 requires:

Accepted Answer

A)  each issue to be considered separately and ranked from greatest dilution to least dilution.
B)  each issue to be included in the calculation on the basis of date of issue, i.e.earliest to the latest issue.
C)  each issue to be considered separately and included in the calculation in the order of the number of ordinary shares to be potentially issued, from highest to lowest.
D)  each issue to be considered separately the number of ordinary shares on issue, from highest to lowest.

Question 13

In the situation that a parent entity is presenting its own accounts and consolidated accounts in the annual report,IAS 33 requires earnings per share to be presented in accordance with its requirements for both the parent entity accounts and the consolidated financial statements.

Accepted Answer

A) True 
 B)False

Question 14

The conversion of potential ordinary shares has no flow-on effects.

Accepted Answer

A) True 
 B)False

Question 15

According to IAS 33,the number of shares included in the weighted-average number of shares is determined by:

Accepted Answer

A)  the number of shares that meet the definition of ordinary shares as at the end of the reporting period.
B)  the number of shares that are on issue as ordinary shares for part or all of the period.
C)  the number of ordinary shares (that meet the definition of ordinary shares)  at the beginning of the period plus any ordinary shares issued during the period less any reductions in ordinary shares during the period.
D)  the number of ordinary shares (as defined)  that are issued or partly paid up at the beginning of the period plus any shares issued during the period whether fully or partly paid up.

Question 16

Ordinary shares are defined by IAS 33 as including ownership interests that are:

Accepted Answer

A)  fully paid up for the whole of the period.
B)  redeemable in full or in part at the discretion of the management of the entity.
C)  called an ordinary share.
D)  part of an equity instrument that is subordinate to all other classes of equity instruments.

Question 17

Why is the EPS number that important in financial reporting that there is one accounting standard devoted to this calculation process?

Accepted Answer

The answer of Why is the EPS number that important...

Question 18

Jackie Plc has a profit after tax of €6 590 000 for the period ended 30 June 2013.In addition it has €1 000 000 of 6% cumulative preference shares.The dividends on the preference shares are not treated as expenses in the statement of comprehensive income. Jackie Plc has 3 000 000 ordinary shares on issue at the beginning of the year 1 July 2012.On 1 November 2012,there was a 1for 6 rights issue with a subscription price of €4.00 each.The current market value of these shares is €4.50.
On 1 March 2013,200 000 partly paid-up ordinary shares were issued at an issue price of €4.50.These shares were partly paid to €2.25.The partly paid shares are permitted proportionate rights to vote and receive dividends based on the relationship between the amount paid up and the issue price.
What is the basic EPS for Jackie Plc for the year ending 30 June 2013 that is in accordance with IAS 33 Earnings per Share?

Accepted Answer

A)  €1.91
B)  €1.93
C)  €1.94
D)  €1.95

Question 19

Daisy Plc has a net income after tax of €2 000 000 for the year ended 30 June 2013.At the beginning of the period Daisy Plc has 900 000 fully paid-up ordinary shares on issue.On 1 December 2012 Daisy Plc had issued a further 300 000 fully paid-up ordinary shares at an issue price of €2.00.On 1 March 2013 Daisy Plc made a one-for-six bonus issue of ordinary shares out of retained earnings.The last sale price of an ordinary share before the bonus issue was €2.50.At the beginning of the current period Daisy Plc also had 500 000,€1.00,5% cumulative preference shares on issue.The dividends on the preference shares are not treated as expenses in the statement of comprehensive income. The basic earnings per share for the period ended 30 June 2012 was €1.50 per share.What are the earnings per share figure for the period ended 30 June 2013 and what are the comparative earnings per share for the previous year to be reported in the 2013 financial reports according to IAS 33?

Accepted Answer

A)  current period (2013)  €1.58; previous period (2012)  €1.29
B)  current period (2013)  €1.60; previous period (2012)  €1.75
C)  current period (2013)  €1.73; previous period (2012)  €1.29
D)  current period (2013)  €1.75; previous period (2012)  €1.75

Question 20

IAS 33 Earnings per Share requires entities to reflect in the diluted earnings per share all outstanding convertible instruments.

Accepted Answer

A) True 
 B)False

Exam 19: Earnings Per Share

Under IAS 33 an entity is not required to disclose earnings per share where a loss has been made for the period.

The effect of a bonus issue on the market value of an entity's equity is:

Describe how the calculation of a basic EPS will be affected by a bonus issue that is in accordance with IAS 33 Earnings per Share.

To maximise dilution of basic EPS,dilutive potential ordinary shares with the highest 'earnings per incremental share' are included in the diluted earnings per share calculation before those with a lower 'earnings per incremental share'.

The requirement to apply IAS 33's definition of earnings and its definition of the number of shares means that the earnings per share figures for companies can be easily compared as they are not subject to the professional judgment involved in other areas of accounting.

IAS 33 requires a bonus issue made during a period to be treated by:

In order to determine whether or not potential ordinary shares are dilutive,IAS 33 requires:

In the situation that a parent entity is presenting its own accounts and consolidated accounts in the annual report,IAS 33 requires earnings per share to be presented in accordance with its requirements for both the parent entity accounts and the consolidated financial statements.

The conversion of potential ordinary shares has no flow-on effects.

According to IAS 33,the number of shares included in the weighted-average number of shares is determined by:

Ordinary shares are defined by IAS 33 as including ownership interests that are:

Why is the EPS number that important in financial reporting that there is one accounting standard devoted to this calculation process?

IAS 33 Earnings per Share requires entities to reflect in the diluted earnings per share all outstanding convertible instruments.