Chapter10 Other Components of Equity; Determination of Earnings Per Share and Book Value Per Share Review Questions Primary source of corporate equity are the (1) investments from shareholders – ordinary and preference Book value per share is the amount of owners’ equity on the company’s books for each share of its share capital 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 Availablefor-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 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 Refer to page 283 of the textbook Refer to page 285 of the textbook 2 Chapter10 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 P1,200,000 – P250,000 190,000 = P5.00 per share Exercise Computation of net income: 2007 net income after tax P33,000,000 2007 net income before tax [P33,000,000 (1 – 34)] Add back major casualty loss Income from operations Income taxes (34% X P68,000,000) Income before extraordinary item Extraordinary item: Casualty loss Less applicable income tax reduction Net income Net income Less provision for preference dividends 50,000,000 18,000,000 68,000,000 23,120,000 44,880,000 P18,000,000 6,120,000 11,880,000 P33,000,000 P33,000,000 Other Components of Equity… (8% of P4,500,000) Income available for ordinary Ordinary shares Earnings per share 360,000 32,640,000 10,000,000 P3.26 Income statement presentation Per ordinary share: Income before extraordinary item P4.45a (1.19)b P3.26 Extraordinary item (net of tax) Net income a P44,880,000 – P360,000 10,000,000 b = P4.45 P11,880,000 10,000,000 = P1.19 Exercise a Net assets (equity): 8% cumulative preference shares Ordinary shares, P5 par, 60,000 shares issued Additional paid-in capital Total paid-in capital Less: Deficit Total net assets (equity) b Book value per ordinary share: Total equity (from part a) Less: Claims of preference shareholders (call price of P220,000 plus dividends in arrears, P16,000) Equity of ordinary shareholders Number of ordinary shares outstanding Book value per share (P570,000 60,000 shares) P P 200,000 300,000 452,800 952,800 146,800 806,000 P 806,000 P P 236,000 570,000 60,000 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 4 Chapter10 Exercise EPS = EPS = P426M – P16M P820M P0.50 Exercise EPS = EPS = EPS = P2,000,000 – P50,000 P800,000 + P200,000 P1,950,000 P1,000,000 P1.95 Exercise EPS = (P114,000) – P76,000 P373,000 + (P12,000 x 7/12) EPS = P190,000 P380,000 EPS = P0.50 Multiple Choice Questions C C B C Other Components of Equity… Test 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 Additional paid-in capital on ordinary shares Total issue price of ordinary shares Number of ordinary shares issued (part c) Average issue price per share (P44,800,000 2,800,000 shares) P14,000,000 30,800,000 P44,800,000 2,800,000 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 Less: Claims of preference shareholders (120,000 shares x P102 call price Equity of ordinary shareholders Number of ordinary shares outstanding (part c) Book value per share (P47,600,000 2,800,000 shares) P59,840,000 12,240,000 P47,600,000 2,800,000 P17 Chapter10 Test Material 10-2 a b c d Par value of all preference share outstanding Par value per preference share Number of preference shares outstanding (P2,400,000 P100) Dividend requirement per preference share (7 1/2% x P100) Number of preference shares outstanding (a) Annual preference share dividend requirement (P7.50 x 24,000 shares) Par value of all ordinary shares outstanding Par value per ordinary shares Number of ordinary shares outstanding (P900,000 P2 per share) P2,400,000 P100 24,000 P7.50 24,000 P180,000 P900,000 P2 450,000 Par value of all ordinary shares issued Paid-in capital in excess of par: Ordinary Total issuance price of all ordinary shares Number of ordinary shares issued (c) Average issuance price per ordinary share (P9,225,000 450,000 shares) P 900,000 8,325,000 P9,225,000 450,000 e Par value of preference shares Par value of ordinary shares Total legal capital P2,400,000 900,000 P3,300,000 f Total legal capital (e) Add: Additional paid-in capital: Ordinary shares Donated capital Total paid-in capital P 3,300,000 8,325,000 720,000 P12,345,000 g Total equity Less: Call price of preference share [24,000 shares (a) x P105 per share] Equity of ordinary shareholders Number of ordinary shares outstanding (c) Book value per share (P12,420,000 450,000 shares) P14,940,000 P20.50 2,520,000 P12,420,000 450,000 P27.60 Other Components of Equity… h Retained earnings, beginning of the year Add: Net income for the year Subtotal Less: Retained earnings, end of the year Total dividends paid during the year Less: Dividends on preference shares (part b) Total dividends on ordinary shares Number of ordinary shares outstanding Dividends per ordinary share (P1,912,500 450,000) P 717,500 3,970,000 P4,687,500 2,595,000 P2,092,500 180,000 P1,912,500 450,000 P4.25 ... 2,800,000 P17 Chapter 10 Test Material 10- 2 a b c d Par value of all preference share outstanding Par value per preference share Number of preference shares outstanding (P2,400,000 P100) Dividend... Multiple Choice Questions C C B C Other Components of Equity… Test 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... divided by P5 par value per share) d Par value of ordinary shares issued and subscribed Additional paid-in capital on ordinary shares Total issue price of ordinary shares Number of ordinary