Question Three

1. Richmond Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after interest was paid, 100, $1,000 bonds are tendered for conversion into 3,000 shares of $10 par value ordinary shares that had a market price of $40 per share. How should Richmond Co. account for the conversion of the bonds into ordinary shares under the book value method? Discuss the rationale for this method.

2. Wilson's Corporation is one of your new audit clients. The corporation's accountant is uncertain how to report earnings per share in accordance with IFRS and is requesting that you provide the following information:

Define the term 'earnings per share' as it applies to a corporation with a capitalization structure composed of only one class of ordinary shares. Explain how earnings per share should be computed and how the information should be disclosed in the corporation's financial statements.

3. Discuss the accounting treatment, if any, that should be given to each of the following items in computing earnings per share of ordinary shares for financial statement reporting.

a) Outstanding preference shares issued at a premium with a par value liquidation right.

b) The exercise at a price below market value but above book value of an ordinary share option issued during the current fiscal year to officers of the corporation.

c) The replacement of a machine immediately prior to the close of the current fiscal year at a cost 20% above the original cost of the replaced machine. The new machine will perform the same function as the old machine that was sold for its book value.

d) The declaration of current dividends on cumulative preference shares.

e) The acquisition of some of the corporation's outstanding ordinary shares during the current fiscal year. The shares were classified as treasury shares.

f) A 2-for-1 share split of ordinary shares during the current fiscal year.

g) A provision created out of retained earnings for a contingent liability from a possible lawsuit.