Question 3d
The following trial balance relates to Downing Co as at 31 March 2016:
| $’000 | $’000 | |
|---|---|---|
| Equity shares of $1 each | 25,000 | |
| Other equity | 11,800 | |
| Retained earnings at 1 April 2015 | 8,000 | |
| 5% convertible loan notes (note (iii)) | 30,000 | |
| Land and buildings at cost (land element $14 million) (note (iv)) | 64,000 | |
| Plant and equipment at cost (note (iv)) | 82,700 | |
| Patent at cost (ten-year life) (note (iv)) | 7,500 | |
| Accumulated depreciation/amortisation at 1 April 2015: | ||
| buildings | 5,000 | |
| plant and equipment | 36,700 | |
| patent | 3,000 | |
| Inventory at 31 March 2016 | 32,100 | |
| Trade receivables | 38,500 | |
| Bank | 2,700 | |
| Current tax (note (v)) | 1,550 | |
| Deferred tax (note (v)) | 4,800 | |
| Revenue (note (i)) | 267,900 | |
| Cost of sales | 166,600 | |
| Distribution costs | 20,000 | |
| Administrative expenses | 22,000 | |
| Contract asset (note (ii)) | 5,000 | |
| Loan note interest paid (note (iii)) | 1,500 | |
| Bank interest | 150 | |
| Other operating income from royalties | 300 | |
| Trade payables | 46,400 | |
| 441,600 | 441,600 |
The following notes are relevant:
| (iii) | Downing Co issued 300,000 $100 5% convertible loan notes on 1 April 2015. The loan notes can be converted to equity shares on the basis of 25 shares for each $100 loan note on 31 March 2018 or redeemed at par for cash on the same date. An equivalent loan note without the conversion rights would have required an interest rate of 8%. The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8%, are: |
|---|
| 5% | 8% | |
|---|---|---|
| End of year 1 | 0·95 | 0·93 |
| 2 | 0·91 | 0·86 |
| 3 | 0·86 | 0·79 |
Required:
| (d) | The finance director of Downing Co has correctly calculated the company’s basic and diluted earnings per share (EPS) to be disclosed in the financial statements for the year ended 31 March 2016 at 148·2 cents and 119·4 cents respectively. On seeing these figures, the chief executive officer (CEO) is concerned that the market will react badly knowing that the company’s EPS in the near future will be only 119·4 cents, a fall of over 19% on the current year’s basic EPS. Required: |
|---|