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CA Intermediate · Advanced Accounting · AS 20 Earnings Per Share

Nirmal Foods Ltd. earned a net profit of Rs 24,00,000 and has 6,00,000 equity shares outstanding throughout the year. Basic EPS is therefore Rs 4. It also has 1,00,000 options exercisable at Rs 20 per share. The average fair value of an equity share during the year was Rs 25. How many potential equity shares are treated as issued for no consideration in computing diluted EPS?

20,000 shares are treated as issued for no consideration. Exercise of 1,00,000 options at Rs 20 raises Rs 20,00,000, which buys 80,000 shares at the Rs 25 fair value; the remaining 20,000 are the free element added to diluted EPS shares.

  1. A20,000Correct
  2. B25,000
  3. C1,00,000
  4. D80,000

Explanation

Shares issued on exercise = 1,00,000. Proceeds = 1,00,000 x 20 = Rs 20,00,000. Shares at fair value = 20,00,000 / 25 = 80,000. Shares for no consideration = 1,00,000 - 80,000 = 20,000. Option 80,000 is the number deemed issued at fair value, not the free element.

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