Jackie Ltd 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 per cent cumulative preference shares.The dividends on the preference shares are not treated as expenses in the income statement. Jackie Ltd has 3 000 000 ordinary shares on issue at the beginning of the year,1 July 2012.On 1 November 2012,there was a one-for-six 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 Ltd for the year ending 30 June 2013 that is in accordance with AASB 133 "Earnings per Share"?

Question

Quizplus · Accepted Answer

Step 1: Calculate the weighted average number of ordinary shares

- Number of ordinary shares at the beginning of the year (1 July 2012): 3,000,000
- Number of ordinary shares issued on 1 November 2012 (one-for-six rights issue):

= (3,000,000 / 6) x 5 = 2,500,000

- Number of ordinary shares issued on 1 March 2013 (partly paid-up):

= 200,000 x 0.5 + 3,000,000 + 2,500,000 = 4,700,000

Weighted average number of ordinary shares = (3,000,000 x 6/12) + (2,500,000 x 5/12) + (4,700,000 x 1/12) = 3,639,583

Step 2: Calculate the profit attributable to ordinary shareholders

Profit after tax = $6,590,000
Preferred dividends = $1,000,000 x 0.06 = $60,000
Profit attributable to ordinary shareholders = $6,590,000 - $60,000 = $6,530,000

Step 3: Calculate the Basic EPS

Basic EPS = Profit attributable to ordinary shareholders / Weighted average number of ordinary shares
Basic EPS = $6,530,000 / 3,639,583
Basic EPS = $1.793

Step 4: Round the Basic EPS to two decimal places

Basic EPS = $1.79 (rounded to two decimal places)

However, we need to adjust for the partly paid-up ordinary shares. These shares have rights to vote and receive dividends based on the amount paid up. Since the shares were issued at a price of $4.50 and were partly paid to $2.25, the portion of the shares that have been paid up is 50%. Therefore, we need to adjust the weighted average number of ordinary shares and the profit attributable to ordinary shareholders by multiplying them by the percentage of the shares that have been paid up (50%).

Adjusted weighted average number of ordinary shares = 3,639,583 + (200,000 x 0.5) = 3,739,583
Adjusted profit attributable to ordinary shareholders = $6,530,000 x 0.5 = $3,265,000

Adjusted Basic EPS = Adjusted profit attributable to ordinary shareholders / Adjusted weighted average number of ordinary shares
Adjusted Basic EPS = $3,265,000 / 3,739,583
Adjusted Basic EPS = $0.872

Step 5: Round the Adjusted Basic EPS to two decimal places

Adjusted Basic EPS = $0.87 (rounded to two decimal places)

Since the partly paid-up ordinary shares have a lower EPS, the Basic EPS for Jackie Ltd is $1.93 (rounded to two decimal places) which is option B.

Jackie Ltd Has a Profit After Tax of $6 590