Question three

1. International Accounting Standards 33 ( IAS 33) states that companies should report the basic earnings per share and diluted earnings per share on the face of the income statement.

Required

1. Explain the difference between basic earnings per share and the diluted earnings per share.(5 marks)
2. Explain any two situations in which a company will report the same figure for basic earnings per share and the diluted earnings per share.(5 marks)

2. ABSA net income after tax in 2021 was K60, 000 and was K50, 000 in 2020.The Company had 10,000 ordinary shares outstanding on January 1, 2020 and has preference shares holders who were entitled to 10% of the profit. A further 1,000 ordinary shares were issued on March 31 2020, while 500 shares were bought back on November 1 2020.

Required

a) Compute the basic earnings per share for ABSA for 2021 and 2020 (6 marks)

3. On January 1, 2020, ABSA Bank issued 6-year, K200, 000 face value, 10% bonds at par the interest is payable quarterly at the end each quarter. Each K1, 000 bond is convertible into 10 shares of ABSA K1 par value ordinary shares. None of the bonds have been converted as of the end of 2021.The effective interest rate on similar bonds is 12%.The tax rate is 25%

Required

1. Explain how ABSA will account for the convertible bond (4 marks)
2. Prepare the journal entry showing how ABSA would record issuance of the bonds on January 1, 2020, (6 marks)
3. Prepare the journal entry to record interest expense for the year 2020. (3 marks)
4. Using the information in 3 (ii) and 3(iii) Compute and interpret the diluted earnings per share for ABSA for 2021 and 2020. (6 marks)