[Son]

Hey guys, trying to understand the difference between the below.. In problem #1, we’re reducing net income by accumulated pref dividends ONLY, basically saying that net income is already net of dividends paid. In problem #2, we’re actually reducing net income by pref dividends. What am I missing? Should I or should I not reduce NI by pref dividends paid?

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Problem #1:

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?

CORRECT Answer – $2.45

EPS = $500K (NI) – $10K (accumulated pref dividend – NOTICE no dividend paid in current year) / 200K (common shares) = 2.45

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Problem #2:

Poe Co. had 300,000 shares of common stock issued and outstanding at December 31, Year 1. No common stock was issued during Year 2. On January 1, Year 2, Poe issued 200,000 shares of nonconvertible preferred stock. During Year 2, Poe declared and paid $75,000 cash dividends on the common stock and $60,000 on the preferred stock. Net income for the year ended December 31, Year 2 was $330,000. What should be Poe’s Year 2 earnings per common share?

a.

CORRECT Answer – $0.90

EPS = $330K (NI) – $60K (pref dividend) / 300K (common stock) = 0.9

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