Question 3 (30 marks) Assume you are the controller of Johnson Company. You are preparing the calculation for basic and diluted earnings per share (EPS) and the related disclosure for Johnson's financial statements. Selected financial information for the fiscal year ended December 31, 2020, is presented below. Johnson Company Selected Statement of Financial Position Information December 31, 2020 Equity Share capital preference, 6% cumulative, convertible, $50 par, $125,000 10,000 shares authorized, 2,500 shares issued and outstanding Share capital-ordinary, $1 par, 1,000,000 shares authorized, 100,000 100,000 shares issued and outstanding Share premium (includes any amounts for ordinary shares, options, 400,000 warrants, and conversions) Retained earnings 600,000 Total equity 51.225.000 Long-term debt Notes payable, 10% $100,000 Convertible bonds payable 500,000 Bonds payable, 10% 600.000 Total long-term debt SL.200.000 Additional information: 1. On January 1, 2020, Johnson had 20,000 ordinary shares outstanding. During 2020, it had the following transactions that affected the ordinary shares: April 1 Issued 20,000 ordinary shares for cash. July 1 Issued a 25% share dividend on ordinary shares. October 1 A 2-for-1 split of ordinary shares became effective. 2. The 6% cumulative, convertible preference shares were issued at par in 2018. Each preference share is convertible into two ordinary shares (adjusted for share dividend and share split). 3. The share options were granted to key executives on January 2, 2017, to purchase 20,000 shares at $15 per share (adjusted for share dividend and share split). The options were exercisable 3 years after the date of grant if the grantee was still an employee of the company. The options expired 5 years from the date of grant. The fair value option-pricing model determined the total compensation cost to be $240,000 at the date of grant. No options were exercised during 2020. 4. The convertible bonds were issued in 2018. The convertible bonds are convertible into ordinary shares at 100 shares per $1,000 bond (adjusted for share dividend and share split). The interest on the liability component of the convertible bonds for 2020, was $45,000. 5. The $600,000 par value 10% bonds were issued with detachable share warrants at 102 on January 1, 2020. One share warrant was issued with each $1,000 par value bond. At the time of issuance, each warrant was selling for $5. If the bonds had no warrants, the company's investment banker determined that they would have been sold at par. The warrants could be exercised to purchase one ordinary share at $25 per warrant. 6. There are no preference dividends in arrears; however, no preference dividends were declared in 2020. 7. The average market price for ordinary shares during 2020 was $20 per share (adjusted for share dividend and share split). 8. Net income for 2020 was $150,000, and the average income tax rate is 20%. Required: (a) Determine the weighted average ordinary shares in calculating basic EPS for the year ended December 31, 2020 for Johnson Company. (5 marks) 6) Prepare the journal entry to record the issuance of the bonds with detachable share warrants on January 1, 2020. (3 marks) (C) Discuss the similarities between convertible bonds and bonds issued with share warrants. (4 marks) (d) Compute the basic and diluted EPS for the year ended December 31, 2020 for Johnson Company. (Round EPS to the nearest cent. Show all necessary computations.) (9 marks) (e) Which instrument(s) is(are) not included in the calculation of diluted EPS for the year ended December 31, 2020? Why? (5 marks) (1) Assume 5,000 share options are exercised on January 31, 2021 when the market price is $23 per share. Prepare the journal entry to record the exercise of share options on January 31, 2021. (4 marks) Question 3 (30 marks) Assume you are the controller of Johnson Company. You are preparing the calculation for basic and diluted earnings per share (EPS) and the related disclosure for Johnson's financial statements. Selected financial information for the fiscal year ended December 31, 2020, is presented below. Johnson Company Selected Statement of Financial Position Information December 31, 2020 Equity Share capital preference, 6% cumulative, convertible, $50 par, $125,000 10,000 shares authorized, 2,500 shares issued and outstanding Share capital-ordinary, $1 par, 1,000,000 shares authorized, 100,000 100,000 shares issued and outstanding Share premium (includes any amounts for ordinary shares, options, 400,000 warrants, and conversions) Retained earnings 600,000 Total equity 51.225.000 Long-term debt Notes payable, 10% $100,000 Convertible bonds payable 500,000 Bonds payable, 10% 600.000 Total long-term debt SL.200.000 Additional information: 1. On January 1, 2020, Johnson had 20,000 ordinary shares outstanding. During 2020, it had the following transactions that affected the ordinary shares: April 1 Issued 20,000 ordinary shares for cash. July 1 Issued a 25% share dividend on ordinary shares. October 1 A 2-for-1 split of ordinary shares became effective. 2. The 6% cumulative, convertible preference shares were issued at par in 2018. Each preference share is convertible into two ordinary shares (adjusted for share dividend and share split). 3. The share options were granted to key executives on January 2, 2017, to purchase 20,000 shares at $15 per share (adjusted for share dividend and share split). The options were exercisable 3 years after the date of grant if the grantee was still an employee of the company. The options expired 5 years from the date of grant. The fair value option-pricing model determined the total compensation cost to be $240,000 at the date of grant. No options were exercised during 2020. 4. The convertible bonds were issued in 2018. The convertible bonds are convertible into ordinary shares at 100 shares per $1,000 bond (adjusted for share dividend and share split). The interest on the liability component of the convertible bonds for 2020, was $45,000. 5. The $600,000 par value 10% bonds were issued with detachable share warrants at 102 on January 1, 2020. One share warrant was issued with each $1,000 par value bond. At the time of issuance, each warrant was selling for $5. If the bonds had no warrants, the company's investment banker determined that they would have been sold at par. The warrants could be exercised to purchase one ordinary share at $25 per warrant. 6. There are no preference dividends in arrears; however, no preference dividends were declared in 2020. 7. The average market price for ordinary shares during 2020 was $20 per share (adjusted for share dividend and share split). 8. Net income for 2020 was $150,000, and the average income tax rate is 20%. Required: (a) Determine the weighted average ordinary shares in calculating basic EPS for the year ended December 31, 2020 for Johnson Company. (5 marks) 6) Prepare the journal entry to record the issuance of the bonds with detachable share warrants on January 1, 2020. (3 marks) (C) Discuss the similarities between convertible bonds and bonds issued with share warrants. (4 marks) (d) Compute the basic and diluted EPS for the year ended December 31, 2020 for Johnson Company. (Round EPS to the nearest cent. Show all necessary computations.) (9 marks) (e) Which instrument(s) is(are) not included in the calculation of diluted EPS for the year ended December 31, 2020? Why? (5 marks) (1) Assume 5,000 share options are exercised on January 31, 2021 when the market price is $23 per share. Prepare the journal entry to record the exercise of share options on January 31, 2021. (4 marks)