Question

Compaq Ltd has a net income after tax of $2 000 000 for the year ended 30 June 2018. At the beginning of the period Compaq Ltd has 900 000 fully paid-up ordinary shares on issue. On 1 January 2018 Compaq Ltd had issued a further 300 000 fully paid-up ordinary shares at an issue price of $2.00. On 1 March 2018 Compaq Ltd made a one-for-five 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 Compaq Ltd 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 2017 was $1.50 per share. Required: a) Calculate the basic

Answer 1

Answer: See explanation

Explanation:

Here are the questions:

a. Calculate the basic EPS amount for 2018.

b. Explain what is diluted EPS. Give one example of a security that can dilute the basic EPS.

First, we need to calculate the weighted average number of equity shares. This will be:

= (900,000 × 12/12) + (300,000 × 12/12) + (240,000 × 10/12)

= 900,000 + 300,000 + 200,000

= 1,400,000

We then calculate the earnings for equity shares. This will be:

Net income = 2,000,000

Less: Dividend on preference shares

= 500,000 × 5% = 25,000

Earnings for equity share = 1,975,000

EPS = 1,975,000/1,400,000

= 1.41

b. Diluted earnings per share (diluted EPS) is used to calculate the earning per share for a company's in a situation whereby there's a conversion of all the convertible securities.

An example of a security that can dilute the basic earnings per share is the preference shares which have been converted.