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CITN Exam Questions on EPS & IAS 23 with simplified Answers

The First Question:

(a) Earnings per share (EPS) is generally regarded as a key accounting ratio for use by investors. However, like any other accounting ratio, it has its limitations.


Explain the importance of EPS and state three (3) of its limitations. (8 Marks)

(b) Pronto Plc. has 100million ordinary shares in issue throughout the year ended December 31, 2019. The profit for the year was N240million.

The entity has two convertible financial instruments in issue:
(i) N50million 10% loan notes, each N100.00 of stock having the right to convert into 200 ordinary shares.

(ii) 40million convertible N1.00 12½% preference shares. Each preference share is convertible to 2 ordinary shares.

The income tax rate is 30%.


Calculate the basic and diluted EPS for Pronto Plc. for the year ended December 31, 2019. (7 Marks)
(Total 15 Marks)

CITN Exam Questions on EPS & IAS 23 with simplified Answers


(a) Earning per share (EPS) is one of the component part of the price earning (P/E) ratio. P/E ratio is used by investors to help them identify the relative risks of an investment. A relatively high P/E ratio usually suggests that the shares are regarded as a safe investment while lower P/E ratio suggests risk and volatility. EPS also measures the potential returns to equity holders in form of dividends and bonus issue.

It can be used to compare and evaluate the EPS of the same entity in different years, that is to evaluate trends in EPS, that of other entities or an industry’s average.

The principal weakness of EPS include the following:
(i) EPS is based on accounting figures and can only be as well reliable as these figures;
(ii) Due to the use of historical figures for its calculations, it is of limited use for predictive purpose;
(iii) EPS may not be comparable among entities because number of shares issued is rarely comparable between them;
(iv) Financial statements are prone to manipulation by management, through window dressing; and
(v) Entities often use different accounting bases to treat transactions, hence entities EPS figures may not be comparable.

Calculation of EPS – Basic

Profit before tax                                                          N240m

Weighed average number of shares                            100m

Basic EPS       = 240/100                                            N2.40/share

(ii)        Calculation of diluted EPS

Profit (W1)                                                                  N248.5m

Weighted average number of shares (W2)                  280m Diluted EPS 248.5/280                     88.75kobo


W1 Calculation of profit for diluted EPS

N’m                 N’m

Profit for the period                                                                              240

Savings on 10% loan notes (10% x 50m)                        5

Tax as savings (30% x N5m)                                      (1.5)                    3.5

Savings on preference dividend (12½% x 40m)                                 5.0

Profit for diluted EPS                                                                         248.5

W2 Calculation of number of shares for diluted EPS.


Share for basic EPS                                                    100

Conversion of loan notes (200/100 x 50)               100

Conversion of preference share (40 x 2)                     80 280

CITN Exam Questions on EPS & IAS 23 with simplified Answers

Examiner’s Findings:

His findings a that The question tests;

  • the importance of earning per share (EPS),
  • its limitations and computation of basic and
  • diluted earnings per share.
  • Majority of the candidates attempted the question
  • Performance was below average.
  • commonest errors were that majority of the candidates did not clearly demonstrate understanding of the importance and limitations of EPS,
  • Many could not correctly calculate basic and diluted earnings per share.

Finally, he advises that you pay more attention to the computation and interpretation of ratio analysis. And, that will aid in better performance in future examinations.

CITN Exam Questions on EPS & IAS 23 with simplified Answers

The Second Question:

Youandi Plc. owned a piece of land which it acquired on March 1, 2018 at a cost of N288million. During the year ended January 31, 2020 the company constructed a new factory on the land. The construction was financed from the pool of existing borrowings. Construction began on May 1, 2019 and was completed on October 31, 2019 at a cost of N432million. The factory was available for use from that day although production did not start until November 2019. The useful life of the factory has been estimated to be 50 years.

Throughout the year, the company’s average borrowings were as follows:

 AmountInterest Rate
Bank Overdraft160,0009.75
Bank Loan280,00010.0


(a) Outline the core provisions of IAS 23, Borrowing Costs. (7 Marks)

(b) Explain the accounting requirements of the issues in Youandi Plc., with relevant calculations for the year ended January 31, 2020, and the carrying amount of the factory as of January 31, 2020. (8 Marks)
(Total 15 Marks)

CITN Exam Questions on EPS & IAS 23 with simplified Answers


(a) According to IAS 23 borrowing cost may be capitalized during the acquisition, construction or production of a qualifying asset. A qualifying asset is any asset which takes a substantial period of time to get ready for its intended use or sale. Borrowing costs include fees, transaction costs and amortization of discount or premium relating borrowing costs. Directly attributable costs may be capitalized if incurred during the capitalization period on qualifying assets.

The capitalisations commence when the borrowing costs have been incurred, expenditure on the asset has been incurred and construction activities have commenced.

The capitalisation of borrowing costs is suspended where there is an extended period of delay in the construction work.

The capitalisation ceases when the asset is substantially ready for its intended use or sale. The borrowing costs of funds borrowed specifically to obtain qualifying asset is the actual borrowing cost incurred less investment income on temporary investment from those borrowings.

When an entity uses general borrowing to obtain qualifying asset, the capitalisations rate is the weighted average of the borrowing costs of the entity.

(b) The borrowing cost relating to the construction of the building is qualified for capitalization. The capitalization rate is the weighted average cost of the borrowed funds. The borrowing costs eligible for capitalization is that incurred from May 1, 2019, to October 31, 2019, when the construction took place.

The asset is ready for use on October 31, 2019 hence depreciations would be calculated from that date.

CITN Exam Questions on EPS & IAS 23 with simplified Answers

The relevant calculations:

Weighted average cost of borrowed funds

 AmountInterest rateTotal
N’000 N’000
Bank overdraft160,0009.75%15,600
Bank loan280,00010%28,000
 840,000 75,600
Capitalisation rate75,600 x 100% = 9%  
Cost of assetN’000N’000 
Borrowing cost (9% x 432m x 6/12) 19,440451,440  
Depreciation (3/12 x 451.4m x 1/50)-2,257  
Carrying amount737,183  

CITN Exam Questions on EPS & IAS 23 with simplified Answers


  • That the question tests the provisions of IAS 23 – Borrowing costs,
  • The accounting treatment and
  • Calculations of interest on the amount of borrowed costs.
  • Few candidates attempted the questions
  • Performance was below average.
  • The common errors were inability to demonstrate clear understanding of the provisions of IAS 23.
  • Candidates are advised to pay more attention to the provisions of all accounting standards in the syllabus
  • To work hard for better performance in future examinations
CITN Exam Questions on EPS & IAS 23 with simplified Answers


Summing Up:

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