Audrey Inc. has 1 million common shares outstanding as of January 1,2014. On Jun

Question

Audrey Inc. has 1 million common shares outstanding as of January 1,2014. On June 30, 2014, 4% convertible bonds were converted into 100,000 additional shares. Up to that point, the bonds had paid interest of $250,000 after tax. Net income for the year was $1,298,678. During the year, the company issued the following:

1. June 30: 10,000 call options giving holders the right to purchase shares of the company for $30.

2. Sept. 30: 15,000 put options allowing holders to sell shares of the company for $25.

On February 1, Audrey also purchased in the open market 10,000 call options on its own shares, allowing it to purchase its own shares for $27. Assume the average market price for the shares during the year was $35.

Also:

3. On September 30, 200,000 convertible preferred shares were redeemed. If they had been converted, these shares would have resulted in an additional 100,000 common shares being issued. The shares carried a dividend rate of $3 per share to be paid on September 30. No conversions have ever occurred.

4. There are 10,000 of $1,000, 5% convertible bonds outstanding with a conversion rate of three common shares for each bond starting January 1, 2015. Beginning January 1, 2018, the conversion rate is six common shares for each bond; and beginning January 1, 2022, it is nine common shares for each bond. The tax rate is 30%.

Instructions:

(a) Calculate the required EPS number under IFRS. For simplicity, ignore the impact that would result from the convertible debt being a hybrid security.

(b) Show the required presentations on the face of the income statement.

Explanation / Answer

1/1/2014 Shares outstanding    1,000,000 6/30/2014 converted shares       100,000 6/30/2014 call option          10,000 9/30/2014 Put option          15,000 Shares outstanding on call option       300,000 average market price                  35            8,571 addition shares- call (10000-8571)            1,429 Total shares    1,101,429 Net Income    1,298,678 interest paid on bond       250,000 Adjusted net income    1,048,678 Basic EPS=            1.049 (1048678/1000000) Diluted EPS computation: Adjusted net income    1,048,678 Total shares    1,101,429 Diluted EPS            0.952 Presentation and disclosure a. Basic and fully diluted EPS are presented for income from continuing operations, income before extraordinary items or change in accounting principle, and net income. b. Reported for all accounting periods presented c. Prior-period EPS is restated for any prior-period adjustments. d. Footnotes are required for diluted EPS.

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