Cases
Practical case
Orvane Technologies SA (fictitious entity), a listed company, closes its books on 31 December 20X6. It has share options and two convertible bonds outstanding (A, issued during the year, and B) and bond C was converted into shares on 1 January. Management prepares diluted earnings per share for 20X6.
Your assignment
Identify the instruments to examine; compute the numerator adjustment after tax, the weighted conversion shares, the incremental shares of the options and the incremental earnings per share of each instrument; rank them and compute, step by step, the cumulated numerator, number of shares and earnings per share; compare each step with the previous one; record the conversion of bond C and the payment of the interest on bond A; assess bond B; present the effect on the financial statements and the earnings per share; conclude.
Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.
Advanced level: no help, the work is grouped by kind.
Document 1
Document 4
Document 1
5 documents: open each one to read it.
Document 1Memo
Orvane Technologies SA (fictitious entity) is listed and closes its books on 31 December 20X6; it has no discontinued operations and no preference shares. Tax rate applicable to interest: 25%. Case conventions: weighting in whole months out of 12, earnings per share rounded to two decimals (half up), comparisons made on the rounded earnings per share.
The figures of the documents, gathered for your work.
| Item | Value | Found in |
|---|---|---|
| Start of the year | January 1 20X6 | |
| End of the year | December 31 20X6 | |
| Per-share basis (one share) | 1 unit | |
| Tax rate applicable to interest | 25% | |
| Profit for 20X6 attributable to the ordinary shares | €2,460,000.00 | |
| Basic weighted average number | 1,000,000 units | |
| Basic earnings per share for 20X6 | €2.46 | |
| Shares issued on conversion of bond C | 50,000 units | |
| Carrying amount of converted bond C | €600,000.00 | |
| Number of options | 150,000 units | |
| Exercise price per share | €8.00 | |
| Average market price for 20X6 | €10.00 | |
| Issue date of bond A | April 1 20X6 | |
| Conversion shares of bond A | 200,000 units | |
| Interest on bond A before tax | €74,000.00 | |
| Conversion shares of bond B | 60,000 units | |
| Interest on bond B before tax | €202,400.00 | |
| Ordinary dividend declared per share | €0.80 |
Not every document matters: identify those that affect the accounting treatment.
Part 1 · Classification · Analysis
Sort each document: does it affect the accounting treatment?
Drag each item into its category, or tap the category under the item.
Entity profile and case conventions
Basic earnings of 20X6 and converted bond C
Share options
Convertible bonds A and B
Ordinary dividend declared
15 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.
Task 1Analysis
Which instruments are potential ordinary shares to be examined for diluted earnings per share, and should bond C be added?
Task 2Calculation
Compute the tax effect and the numerator adjustment after tax for bonds A and B.
Part 1 · Calculation
Compute the tax effect and the numerator adjustment after tax for bonds A and B.
Result: Adjustment after tax for bond B
Task 3Calculation
Compute the weighted conversion shares of bonds A and B.
Part 1 · Calculation
Compute the weighted conversion shares of bonds A and B.
Result: Weighted conversion shares of bond B
Task 4Calculation
Compute the price difference of the options.
Part 1 · Calculation
Compute the price difference of the options.
Task 5Calculation
Compute the incremental shares of the options (treasury stock method).
Part 1 · Calculation
Compute the incremental shares of the options (treasury stock method).
Task 6Calculation
Compute the incremental earnings per share of the options and of bonds A and B.
Part 1 · Calculation
Compute the incremental earnings per share of the options and of bonds A and B.
Result: Incremental earnings per share of bond B
Task 7Analysis
Rank the instruments from the lowest to the highest incremental earnings per share and compute the cumulated number of shares at each step.
Part 1 · Calculation
Rank the instruments from the lowest to the highest incremental earnings per share and compute the cumulated number of shares at each step.
Result: Number of shares after bond B
Task 8Calculation
Compute the cumulated numerator at each step.
Part 1 · Calculation
Compute the cumulated numerator at each step.
Result: Numerator after bond B
Task 9Calculation
Compute earnings per share at each step.
Part 1 · Calculation
Compute earnings per share at each step.
Result: Earnings per share after bond B
Task 10Calculation
Compare each step with the previous one and retain the lower earnings per share.
Part 1 · Calculation
Compare each step with the previous one and retain the lower earnings per share.
Result: Diluted earnings per share retained at step 3
Task 11Journal entries
Record the conversion of bond C on 1 January 20X6.
Part 1 · Journal entry · Journal entries
Entry 1 of 1
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Task 12Journal entries
Record the payment of the interest on bond A.
Part 1 · Journal entry · Journal entries
Entry 1 of 1
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Task 13Professional judgement
Should bond B be retained in diluted earnings per share?
Task 14Effects on the financial statements
What is the cumulative effect of the two entries on the financial statements?
Part 1 · Classification · Analysis
State the direction of the effect on each financial statement aggregate.
Financial position (balance sheet)
Profit or loss
Other comprehensive income
Equity
Part 2 · Calculation · Analysis
Quantify the effect on the aggregates concerned.
Result: Amount of the effect — Equity
Task 15Conclusion
Write the conclusion, including the presentation of earnings per share.
Your working draft for this file: points noted, leads, intermediate calculations.
Saved on this device only; never graded.
Complete every item of the file to submit it (0 / 18).
Document this file
These working papers use the data and results of this case.
Normative references