Question

A company has 10 000 ordinary shares and 10 000 10% R2 preference shares in issue throughout

2023. The profit after tax is R100 000.
Calculate the basic earnings for the year ended 30 June 2023 assuming that the preference shares
are:
a) Non cumulative and non redeemable (equity) declared in the year (3)
b) Non cumulative and non redeemable (equity) NOT declared in the year. (3)
c) Cumulative and redeemable (liabilities) declared in the year. (2)
d) Cumulative and redeemable (liabilities) NOT declared in the year.

Answer 1

To calculate the basic earnings per share (EPS), we need to determine the amount of profit available to ordinary shareholders after preference dividends have been accounted for. The preference dividends are calculated based on the terms of the preference shares. Let's go through each scenario:

a) Non-cumulative and non-redeemable (equity) declared in the year:

Since the preference dividends are declared, we need to subtract them from the profit after tax to find the earnings available to ordinary shareholders. The preference dividend is 10% of the par value of the preference shares.

Preference dividend = 10,000 shares * R2 * 10% = R20,000

Profit available for ordinary shareholders = Profit after tax - Preference dividend

Profit available for ordinary shareholders = R100,000 - R20,000 = R80,000

Basic earnings per ordinary share = Profit available for ordinary shareholders / Number of ordinary shares

Basic earnings per ordinary share = R80,000 / 10,000 = R8 per share

b) Non-cumulative and non-redeemable (equity) NOT declared in the year:

Since the preference dividends are not declared, they are not subtracted from the profit after tax.

Profit available for ordinary shareholders = Profit after tax = R100,000

Basic earnings per ordinary share = Profit available for ordinary shareholders / Number of ordinary shares

Basic earnings per ordinary share = R100,000 / 10,000 = R10 per share

c) Cumulative and redeemable (liabilities) declared in the year:

Again, since the preference dividends are declared, we subtract them from the profit after tax.

Preference dividend = 10,000 shares * R2 * 10% = R20,000

Profit available for ordinary shareholders = Profit after tax - Preference dividend

Profit available for ordinary shareholders = R100,000 - R20,000 = R80,000

Basic earnings per ordinary share = Profit available for ordinary shareholders / Number of ordinary shares

Basic earnings per ordinary share = R80,000 / 10,000 = R8 per share

d) Cumulative and redeemable (liabilities) NOT declared in the year:

Even though the dividends are not declared this year, since the preference shares are cumulative, the dividends accumulate and are considered a liability. Therefore, they are still subtracted from the profit after tax.

Preference dividend = 10,000 shares * R2 * 10% = R20,000

Profit available for ordinary shareholders = Profit after tax - Preference dividend

Profit available for ordinary shareholders = R100,000 - R20,000 = R80,000

Basic earnings per ordinary share = Profit available for ordinary shareholders / Number of ordinary shares

Basic earnings per ordinary share = R80,000 / 10,000 = R8 per share

In summary:

a) R8 per share

b) R10 per share

c) R8 per share

d) R8 per share

Note that in cases c) and d), even though the preference shares are classified as liabilities, the preference dividends are treated similarly to when they are classified as equity for the purpose of calculating basic EPS. The dividends are subtracted from the profit after tax because they are an obligation of the company due to their cumulative nature.

Step-by-step explanation:

Answer 2

Step-by-step explanation:

) For non-cumulative and non-redeemable preference shares declared in the year, the basic earnings available to ordinary shareholders is the profit after tax minus the preference dividends declared. In this case, as the preference shares are non-cumulative, any undeclared preference dividends are not carried forward.

Basic Earnings

=

Profit After Tax

−

Preference Dividends Declared

Basic Earnings=Profit After Tax−Preference Dividends Declared

b) If the non-cumulative and non-redeemable preference shares are not declared in the year, then ordinary shareholders receive the entire profit after tax.

Basic Earnings

=

Profit After Tax

Basic Earnings=Profit After Tax

c) For cumulative and redeemable preference shares declared in the year, the basic earnings is calculated similarly to the non-cumulative case, but with the understanding that any undeclared preference dividends accumulate and must be paid in the future.

d) If cumulative and redeemable preference shares are not declared in the year, it means that no preference dividends are paid, and ordinary shareholders receive the entire profit after tax.

Please provide the information on the preference dividends declared for each scenario so I can help you with the calculations.