BI Ltd has 7,000,000 ordinary shares on issue at the beginning of the year,1 July 2004.These shares were issued at $4.50 each and have a current market value of $8.00.On 1 September 2004,BI Ltd bought back 500,000 ordinary shares originally issued at $4.50 for $6.50 each.On 1 December 2004,1,000,000 shares were issued fully paid up at the current market value of these shares.Also during the period,800,000 partly paid-up ordinary shares were issued.They were issued on 1 February 2005 at an issue price of $7.20.These shares were partly paid to $4.50.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. BI Ltd has 1,000,000,$1.00 preference shares that provide non-cumulative dividends at a rate of 10 per cent.The dividends were not paid this period.
For the year ended 30 June 2004,the net loss after tax was $1,000,000.
What are the basic earnings per share for BI Ltd for the year ended 30 June 2005?

Question

Quizplus · Accepted Answer

To calculate basic earnings per share, we need to divide the net profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Since the company had a net loss after tax for the year ended 30 June 2004, we need to use the weighted average number of ordinary shares outstanding for the current year.

Weighted average number of ordinary shares outstanding:
Beginning balance: 7,000,000
Less shares bought back: (500,000)
Plus shares issued on 1 December 2004: 1,000,000
Plus partly paid-up shares issued on 1 Feb 2005: 800,000 x ($4.50/$7.20) = 500,000
Weighted average number of ordinary shares outstanding: 7,000,000 + 1,000,000 + 500,000 = 8,500,000

Net profit attributable to ordinary shareholders:
Net loss after tax for year ended 30 June 2004: ($1,000,000)
Non-cumulative dividends on preference shares: ($1,000,000 x 10%) = ($100,000)
Net profit attributable to ordinary shareholders: ($1,000,000) - ($100,000) = ($900,000)

Basic earnings per share: 
($900,000) / 8,500,000 = ($0.11)
Since there is a net loss attributable to ordinary shareholders, we represent the basic earnings per share as negative. Therefore the answer is D, ($0.14).

BI Ltd Has 7,000,000 Ordinary Shares on Issue at the Beginning