Submitted by: Limense, Princess Kathleen S.

(FARON & COURAGE COMPANY)

1. Faron Company reported the following at year end:

Bonds payable, 10% 1,000,000

Ordinary shares, P100 par,80,000 shares 5,000,000

Net income 1,730,000

The bonds are convertible into ordinary shares in the ratio of 10 ordinary shares for P1,000 each. The
income tax rate is 30%.

REQUIRED:

A. Basic earnings per share

B. Diluted earnings per share

ANSWER:

1. Basic earnings per share (1,730,000/80,000) 21.63

2. Ordinary shares outstanding 80,000

Assumed issued ordinary share through bond conversion (1,000 x 10) 10,000
Total ordinary share 90,000

Net Income 1,730,000

Add: Interest on bonds payable (10% x 1,000,000 x 70%) 70,000
Adjusted income 1,800,000

Diluted EPS (1,800,000 / 60,000) 30

2. Courage Company had the following share capital at the end of reporting period:

Preference share capital* 5,000,000

Ordinary share capital** 10,000,000

*The cumulative preference share capital has P100 par, 50,000 shares outstanding, 10% dividend rate
and each share convertible into 2 ordinary shares.

**The ordinary share capital has P50 par, 500,000 shares authorized, 200,000 shares outstanding.

The entity reported net income of P5,400,000 for the current year. No share capital activity took place
during the year. The income tax rate is 30%. The preference share was issued in the prior year at par
value.

REQUIRED:

A. Basic earnings per share

B. Diluted earnings per share

ANSWER:

1. Net income 5,400,000

Less: Preference dividend (10% x 5,000,000) 500,000
Adjusted income to ordinary share 4,900,000

Basic EPS (4,900,000 / 200,000) 24.50

2. Ordinary share outstanding 200,000

Assumed issue ordinary shares through bond conversion
of preference share (50,000 x 2) 100,000
Total ordinary shares 300,000

Diluted EPS (5,400,000 / 300,000) 18