Mavis Corporation is a new audit client of yours and has not reported earnings per share data in its annual reports to shareholders in the past. The treasurer, Andrew Benninger, has asked you to provide information about the reporting of earnings per share data in the current year's annual report in accordance with generally accepted accounting principles according to IFRS.
Instructions
(a) Define the term "earnings per share" as it applies to a corporation with a capitalization structure that is composed of only one class of common shares. Explain how earnings per share should be calculated and how the information should be disclosed in the corporation's financial statements.
(b) Discuss the treatment, if any, that should be given to each of the following items in calculating the earnings per common share for financial statement reporting:
1. Outstanding preferred shares issued at a premium with a par value liquidation right
2. The exercise at a price below market value but above carrying amount of a call option on common shares that was issued during the current fiscal year to officers of the corporation.
3. The replacement of a machine immediately before the close of the current fiscal year at a cost that is 20% above the original cost of the replaced machine. The new machine will perform the same function as the old machine, which was sold for its carrying amount.
4. The declaration of current dividends on cumulative preferred shares
5. The existence of purchased call options that allow the company to purchase shares of its own common shares at a price that is lower than the average market price
6. The acquisition of some of the corporation's outstanding common shares during the current fiscal year. The shares were classified as treasury shares.
7. A 2-for-1 stock split of common shares during the current fiscal year