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Anybody can explain this to me?


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#1 bella.dreamer

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Posted 24 January 2014 - 10:31 PM

Wouldn't the calculation be NI 500,000 - Div Paid 20,000 [16,000 paid + 4,000 accumulated]. I assumed 16,000 would be 10,000/year *2 = 20,000 dividends on preferred stock for y1 & y2. and if the company paid 16,000, 4,000 dividends are accumulated on Preferred shares. But still I thought we have to deduct 500,000 - 20,000 = NI 480,000/200,000 = 2.4. available for common shares.  I thought dividends paid or accumulated would be deducted from NI because the company paying the dividends pays from after tax earnings.

 

Ute Co. had the following capital structure during Year 1 and Year 2:

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, Year 2. Ute paid no preferred dividends during Year 1 and paid $16,000 in preferred dividends during Year 2. In its December 31, Year 2, income statement, what amount should Ute report as basic earnings per share?

 

a.

$2.42

b.

$2.50

c.

$2.48

d.

$2.45

 

 

Explanation

Choice "d" is correct. $2.45 earnings per share.

  Year 1 Year 2
 
Net income ? 500,000
 
Less: Cumulative preferred Stock dividend "requirement" ($10 par × 25,000 shs × 4%) (10,000) (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.



#2 astone

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Posted 26 January 2014 - 09:09 PM

The calculation to arrive at the net income amount for calculating basic EPS:

 

Net Income less the cumulative preferred dividend earned in the income statement period.

 

If the company presented comparative income statements, 10,000 would be deducted from year 1 income and 10,000 would be deducted from year 2 income.

The income statements (unlike the balance sheet) depicts the financial performance for a period rather than cumulative balances. The amount paid is a distractor.


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#3 bella.dreamer

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Posted 27 January 2014 - 01:15 AM

Uh, I got you. Thanks a lot for the clear and concise explanation.