Question

PRETEND you are living in the new “Tech-Era” of great developments in electronic equipment and

space living. Colonies have sprung up on several planets and people engage in inter planetary travel on a

routine basis using highly innovative high speed vehicles. You are employed by a large accounting

consultancy firm Gallactika Accountants. This morning, the partner with whom you work, Mr. Spaze

Mann, starts you off for the day by assigning you to a client, Jupp Jellies, Inc., located somewhere on

Jupiter. “Why don’t you fly to their office and settle some equity related issues?”, he suggests. And so

you don your thermo-dynamic space suit, grab the breathing apparatus and jump into the office spacecraft

headed for Jupiter. It should take you about 30 minutes to reach your destination provided the traffic

movement on Spaceway 1 is operating smoothly.

The ride to Jupiter was however somewhat bumpy due to some bad astronomic conditions. It had become

even more tense when the screen flashed the news of a software glitch and the possibility of abandoning

the spacecraft. Fortunately Earth Control was able to resolve the issue quickly and thereafter, all you

could see were some pieces of debris from an earlier exploded satellite floating by your window. You

were beginning to wonder what would be the estimated cost of cleaning this debris (considered this as a

great idea for a question on ARO on a future ___ you were drafting for your accounting

professor) when you arrived at your destination.

Upon arrival, you met Mr. Shakin Jell, their Financial Accounting Manager for an initial information

gathering session before beginning your work. You should note that Jupp Jellies follows IFRS which has

been adopted by all planetary business communities. Mr. Jell informs you that he would like you to assist

him in some of the more troubling issues remaining to be resolved. Following a quick snack of a

chocolate sundae and strawberry cookies, you went to work on the manager’s problems.

The company had begun their calendar fiscal year of 2018 with 799,000 common shares issued and

outstanding. Mr. Jell provided you with additional information on the company’s equity and debt

transactions for the year.

L On February 1, it had issued 48,000 shares; 840,000 shares on May 1 and 72,000 shares on

September 1, respectively.

L Further on March 1, it had acquired 12,000 shares from the market and had immediately

cancelled them.

L The company also had outstanding at the beginning of the year, 8% convertible preferred shares

capitalized at $1,560,000. The preferred shareholders were eligible to convert their shares into

64,000 common shares.

L Jupp Jellies had not declared any dividends for 2017 or for 2018.

L The company also reported convertible debt. These were bonds payable, issued at par on August

1, 2018, for $15,000,000 and paying interest annually at a 4% rate. Each $1,000 par value bond

could be converted into 8 common shares of the company.

L Companies at Jupiter are taxed at a flat rate of 35%.

L Upon inquiring further, Mr. Jell told you about the the two types of options which had been

issued in prior years and were outstanding as at the beginning of 2018. Put options had been

issued to employees which entitled holders to sell 358,000 of the company’s common shares to

the company for $15.00 each. The company had also issued call options to the management team

which enabled them to buy 230,000 common shares at $19.00 each. Jupp Jellies’ shares traded at

an annual average price of $10.00 each. All options remained outstanding at the end of the year.

L And finally, the company reported net income of $4,022,400. There was nothing to report for

Discontinued Operations.

With your meeting having concluded, Mr. Jell, almost apologetically, handed you a list of questions he

wanted you to resolve and insisted that you support your responses with clear detailed computations. He

did add that there would be other questions arising from related transactions which were to follow once

this one was resolved.

REQUIRED:

a. Determine the weighted average number of shares to determine the basic earnings per share for 2018.

b. Determine the basic earnings per share for 2018, assuming

(i) the preferred shares were cumulative.

(ii) the preferred shares were not cumulative.

c. Identify the potentially dilutive securities which could be included in the computation of diluted

earnings per share. Be sure to support your answer with detailed computations and rank these

securities where required.

d. Determine the diluted earnings per share to be reported by the company in 2018 assuming preferred

shares were cumulative.

e. For this part only, assume that the net income of $4,022,400 was as stated above but included an

after-tax gain of $1,235,200 from discontinued operations. Assume the preferred shares were

cumulative. Determine the basic and diluted earnings per share to be disclosed for 2018 and show

how they would be reported. (Hint: recalculate the basic and diluted earnings per share for both

continuing and discontinued operations).

f. For this part only, assume that the company declared a 3 for 1 stock split on June 1. What would

be the revised weighted average number of shares for determining the basic earnings per share.