SECTION A First Cup Ltd., a Canadian coffee retailer and roaster which operates more than 1,000 cafes in Canada, reported the following balances as at December 31, 2019: 7% Par $100 convertible bonds, issued at par $ 250,000 3,000 call options, each entitled to purchase 1 common share Cumulative Preferred shares, 36,000 convertible shares outstanding $ 960,000 Common shares, 112,500 shares issued and outstanding 2.880.000 Contributed surplus on repurchase of common shares 31,200 Retained earnings 1,032.000 First Cup Ltd. applies IFRS. The company also informed you details related to the following transactions during 2020: a] On February 1, the company declared and distributed a 20% stock dividend for its common shareholders. The shares were being traded in the market at $30. b] On March 1, it acquired 18,000 of its own common shares in the market at $30.00 per share and retired them on the same day. c] On April 1, the company issued 17,500 common shares in exchange for plant and equipment assessed at $336,000. d] On May 1, 40% of the call option holders exercised their options when the market price of the common share was $31. As these options were issued before stock dividends, options holders receive an increased number of shares considering a 20% stock dividends (i.e. adjust for stock dividend). e] On May 15, the company declared a 3:1 stock split on common shares. The common shares were being traded at the adjusted market price of $32.00 per share f] On August 1, the company issued share certificates for 3,708 common shares to subscribers who had applied to an earlier share subscription issue. These subscribers had paid for the shares they had subscribed at $34 per share. g] On October 1, 20% of the bond holders submitted their bonds to the company for conversion into common shares. As the bonds were issued before stock dividends and stock split, the number of shares given to reward conversion need to be adjusted consequently. h] No Dividends have been declared in the previous two years. Dividends for the current year were also not declared. Additional Information i] The cumulative preferred shares had been issued several years ago when the company was incorporated. Cumulative preferred shares carried a dividend rate of $2.10 per share and as at January 1, 2020, one preferred share could be converted into two common shares. ii] The company reported earnings from operations of $1,847,790 for 2020. There were no discontinued items to report in 2020. iii] The bonds had been issued at par in 2017. Assume No premium was charged for the conversion rights and debt was credited for the full amount received. Each $100 bond was convertible into 8 common shares. Required: 1- Consider transaction effects of items [a], [b], [c], [e], and [1] which were described above to answer the following questions (you are not required to provide journal entries) 1. For transaction (a). Retained earnings decrease by: a $576,000 b. 675.000 c. 3,375.000 d. None of the above 2. For transaction [a], the journal entry is: a. To debit common shares and credit retained earnings b. To debit retained earnings and credit dividends payable c. To debit retained earnings and credit common shares d. None of the above 3. For transaction [b]. common shares is decreased by a. $474.000 b. 540.000 c. 460.800 d. None of the above 4. For transaction [b], retained earnings is decreased by a. $66,000 b. 31,200 c. 540,000 d. 34,800 5. The journal entry to record transaction [b] is a. Debit common shares, debit contributed capital, debit retained earnings and credit cash b. Debit common shares, debit retained earnings and credit cash c. Debit common shares, credit contributed capital, debit retained earnings and credit cash d. Debit common shares, credit contributed capital, debit preferred shares, debit retained earnings and credit cash 6. For transaction (c). common shares increased by a. 525.000 b. 448,000 c. 500.000 d. 336.000 7. For transaction [e], the journal entry is a. Debit retained earnings and credit common shares b. No journal entry and add a note 3:1 Stock split 407.820 new shares issued for 135.940 existing shares C. Debit common shares and credit retained earnings d. None of the above 8. For transaction [] common shares is credited: a. 111.240 b. 126,072 c. 100.000 d. None of the above 9. For transaction [ the journal entry is a. Debit share subscriptions receivable and credit common shares b. Debit common shares subscribed and credit common shares C. Debit contributed surplus and credit common shares d. None of the above 2. Determine the weighted average number of shares for determining the basic earnings per share for 2020 using this template Weighted average number of shares Date Ratio #number of shares Restatement WACS 1/1/15 | 1/2/15 1/3/15 1/4/15 1/5/15 15/5/15 1/8/15 1/10/15 Balance WACS= 3. Determine the basic earnings per share for 2020: You must still continue to use all the basic information contained above except where stated otherwise. Now assume for this section only the following: i] Assume that none of the convertible bonds nor the convertible preferred shares were converted during 2020. Similarly, none of the call options were exercised during the year. The strike (exercise) price for the call options, duly adjusted for dividends and splits, was $9 per share. ii] Further assume that on January 1, 2020, the company had also issued 3,300 put options to its directors as compensation for their services during 2019. Each option enabled the holder to sell I common share to the company at a strike (exercise) price of $12 which is also similarly adjusted for dividends and splits. All options were still outstanding on December 31, 2020. iii] Assume a 20% tax rate for 2020 and an average market price of $10 (which reflects adjustments for dividends and splits) for the company's common shares during 2020. iv] Regardless of your computations in Section A above, assume that the weighted average number of shares for basic EPS is now 407,400 shares and calculate basic eps dependently to identify dilutive securities Required: To answer the following questions (question 10 to 23). You need to identify the potentially dilutive securities which could be included in the computation of diluted earnings per share and rank them from the most dilutive to the least dilutive. You need also to calculate diluted earnings per share to be reported by the company in 2020 using the schedule given below (after question 23). 10. The basis eps equals a $3.35 b. 4.35 c. S. d. None of the above To determine the dilutive effect of call options, 11. Cash inflow from options equals a $10.800 b. 27.000 c. 97.200 d. None of the above 12. You find that incremental shares equal a. 9,720 b. 1,080 c. O d. None of the above 13. You find that incremental eps equal a. $0 b. 0.22 c. 0.25 d. 0.33 To determine the dilutive effect of Put options, 14. Cash required for options a $142.560 b. 11.880 c. 118.800 d. None of the above 15. Number of shares to be issued (total) a. 11.880 b. 14.256 c. 1.188 d. None of the above 16. The deficit of shares (incremental shares) equals a. 2,500 b. 2,600 c. 2,376 d. None of the above After Determining whether bonds are dilutive or not 17. The number of shares to be issued is a. 72.000 b. 60.000 C. 24.000 d. 50.00 18. The incremental eps a. $4.6 b. 0.5 c. 0.6 d. 0.29 19. Consequently, the bonds are antidilutiv a. Yes b. No Determining whether convertible preferred shares are dilutive or not 20. The dividends avoided for the calculation of bonds dilutive effect equal a $75,600 b. 226,800 c. 302,400 d. None of the above 21. Shares to be issued a. 36,000 b. 72.000 c. 259.200 d. None of the above 22. Incremental eps for preferred shares is a $0.2917 b. 0.2930 c.0.3502 d. 0.5555 Number of shares EPS Use the template to calculate Diluted EPS: Income Basic EPS Put options Call options Bonds Preferred shares Diluted EPS SECTION A First Cup Ltd., a Canadian coffee retailer and roaster which operates more than 1,000 cafes in Canada, reported the following balances as at December 31, 2019: 7% Par $100 convertible bonds, issued at par $ 250,000 3,000 call options, each entitled to purchase 1 common share Cumulative Preferred shares, 36,000 convertible shares outstanding $ 960,000 Common shares, 112,500 shares issued and outstanding 2.880.000 Contributed surplus on repurchase of common shares 31,200 Retained earnings 1,032.000 First Cup Ltd. applies IFRS. The company also informed you details related to the following transactions during 2020: a] On February 1, the company declared and distributed a 20% stock dividend for its common shareholders. The shares were being traded in the market at $30. b] On March 1, it acquired 18,000 of its own common shares in the market at $30.00 per share and retired them on the same day. c] On April 1, the company issued 17,500 common shares in exchange for plant and equipment assessed at $336,000. d] On May 1, 40% of the call option holders exercised their options when the market price of the common share was $31. As these options were issued before stock dividends, options holders receive an increased number of shares considering a 20% stock dividends (i.e. adjust for stock dividend). e] On May 15, the company declared a 3:1 stock split on common shares. The common shares were being traded at the adjusted market price of $32.00 per share f] On August 1, the company issued share certificates for 3,708 common shares to subscribers who had applied to an earlier share subscription issue. These subscribers had paid for the shares they had subscribed at $34 per share. g] On October 1, 20% of the bond holders submitted their bonds to the company for conversion into common shares. As the bonds were issued before stock dividends and stock split, the number of shares given to reward conversion need to be adjusted consequently. h] No Dividends have been declared in the previous two years. Dividends for the current year were also not declared. Additional Information i] The cumulative preferred shares had been issued several years ago when the company was incorporated. Cumulative preferred shares carried a dividend rate of $2.10 per share and as at January 1, 2020, one preferred share could be converted into two common shares. ii] The company reported earnings from operations of $1,847,790 for 2020. There were no discontinued items to report in 2020. iii] The bonds had been issued at par in 2017. Assume No premium was charged for the conversion rights and debt was credited for the full amount received. Each $100 bond was convertible into 8 common shares. Required: 1- Consider transaction effects of items [a], [b], [c], [e], and [1] which were described above to answer the following questions (you are not required to provide journal entries) 1. For transaction (a). Retained earnings decrease by: a $576,000 b. 675.000 c. 3,375.000 d. None of the above 2. For transaction [a], the journal entry is: a. To debit common shares and credit retained earnings b. To debit retained earnings and credit dividends payable c. To debit retained earnings and credit common shares d. None of the above 3. For transaction [b]. common shares is decreased by a. $474.000 b. 540.000 c. 460.800 d. None of the above 4. For transaction [b], retained earnings is decreased by a. $66,000 b. 31,200 c. 540,000 d. 34,800 5. The journal entry to record transaction [b] is a. Debit common shares, debit contributed capital, debit retained earnings and credit cash b. Debit common shares, debit retained earnings and credit cash c. Debit common shares, credit contributed capital, debit retained earnings and credit cash d. Debit common shares, credit contributed capital, debit preferred shares, debit retained earnings and credit cash 6. For transaction (c). common shares increased by a. 525.000 b. 448,000 c. 500.000 d. 336.000 7. For transaction [e], the journal entry is a. Debit retained earnings and credit common shares b. No journal entry and add a note 3:1 Stock split 407.820 new shares issued for 135.940 existing shares C. Debit common shares and credit retained earnings d. None of the above 8. For transaction [] common shares is credited: a. 111.240 b. 126,072 c. 100.000 d. None of the above 9. For transaction [ the journal entry is a. Debit share subscriptions receivable and credit common shares b. Debit common shares subscribed and credit common shares C. Debit contributed surplus and credit common shares d. None of the above 2. Determine the weighted average number of shares for determining the basic earnings per share for 2020 using this template Weighted average number of shares Date Ratio #number of shares Restatement WACS 1/1/15 | 1/2/15 1/3/15 1/4/15 1/5/15 15/5/15 1/8/15 1/10/15 Balance WACS= 3. Determine the basic earnings per share for 2020: You must still continue to use all the basic information contained above except where stated otherwise. Now assume for this section only the following: i] Assume that none of the convertible bonds nor the convertible preferred shares were converted during 2020. Similarly, none of the call options were exercised during the year. The strike (exercise) price for the call options, duly adjusted for dividends and splits, was $9 per share. ii] Further assume that on January 1, 2020, the company had also issued 3,300 put options to its directors as compensation for their services during 2019. Each option enabled the holder to sell I common share to the company at a strike (exercise) price of $12 which is also similarly adjusted for dividends and splits. All options were still outstanding on December 31, 2020. iii] Assume a 20% tax rate for 2020 and an average market price of $10 (which reflects adjustments for dividends and splits) for the company's common shares during 2020. iv] Regardless of your computations in Section A above, assume that the weighted average number of shares for basic EPS is now 407,400 shares and calculate basic eps dependently to identify dilutive securities Required: To answer the following questions (question 10 to 23). You need to identify the potentially dilutive securities which could be included in the computation of diluted earnings per share and rank them from the most dilutive to the least dilutive. You need also to calculate diluted earnings per share to be reported by the company in 2020 using the schedule given below (after question 23). 10. The basis eps equals a $3.35 b. 4.35 c. S. d. None of the above To determine the dilutive effect of call options, 11. Cash inflow from options equals a $10.800 b. 27.000 c. 97.200 d. None of the above 12. You find that incremental shares equal a. 9,720 b. 1,080 c. O d. None of the above 13. You find that incremental eps equal a. $0 b. 0.22 c. 0.25 d. 0.33 To determine the dilutive effect of Put options, 14. Cash required for options a $142.560 b. 11.880 c. 118.800 d. None of the above 15. Number of shares to be issued (total) a. 11.880 b. 14.256 c. 1.188 d. None of the above 16. The deficit of shares (incremental shares) equals a. 2,500 b. 2,600 c. 2,376 d. None of the above After Determining whether bonds are dilutive or not 17. The number of shares to be issued is a. 72.000 b. 60.000 C. 24.000 d. 50.00 18. The incremental eps a. $4.6 b. 0.5 c. 0.6 d. 0.29 19. Consequently, the bonds are antidilutiv a. Yes b. No Determining whether convertible preferred shares are dilutive or not 20. The dividends avoided for the calculation of bonds dilutive effect equal a $75,600 b. 226,800 c. 302,400 d. None of the above 21. Shares to be issued a. 36,000 b. 72.000 c. 259.200 d. None of the above 22. Incremental eps for preferred shares is a $0.2917 b. 0.2930 c.0.3502 d. 0.5555 Number of shares EPS Use the template to calculate Diluted EPS: Income Basic EPS Put options Call options Bonds Preferred shares Diluted EPS