| Posted: 27 Jun 2008 at 15:57 | IP Logged
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Ute Co. had the following capital structure during 19X3 and 19X4:
Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding $250,000
Common stock, $5 par, 200,000 shares issued and outstanding 1,000,000
Ute reported net income of $500,000 for the year ended December 31, 19X4. Ute paid no preferred dividends during 19X3 and paid $16,000 in preferred dividends during 19X4. In its December 31, 19X4, income statement, what amount should Ute report as basic earnings per share?
a. 2.42
b. 2.45
c. 2.48
d. 2.50
Choice "b" is correct. $2.45 earnings per share.
19X4
$ 500,000
Less: Cumulative preferred Stock dividend "requirement" ($10 par x 25,000 shs x 4%) (10,000)
Income available to common shares 490,000
Divide by average common shares O/S ÷ 200,000
Basic earnings per common share $ 2.45
Note: Since the preferred stock dividends are cumulative, when they are declared or paid is not relevant.
I see why they are subtracting 10,000, but why did they ignore the $16,000 preferred div. payed in 19x4? I thought you were supposed to subtract preferred dividends from NI.
The only reason i can think of is b/c the 16,000 is a non-cumulative dividend, and if it was, the problem did not state it.
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