[yhe1223]

Ute Co. had the following capital structure during the previous and current years:

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 current year ended December 31. Ute paid no preferred dividends

during the previous year and paid $16,000 in preferred dividends during the current year. In its current year December

31 income statement, what amount should Ute report as earnings per share?

$2.42

$2.45

$2.48

$2.50

Answer:

B Explanation:

Basic earnings per share, with a simple capital structure is equal to net income minus the preferred dividends declared

or the dividend preference on cumulative preferred stock for the current period (even though not declared) divided by

the number of shares of common stock and common stock equivalents outstanding. ($500,000 – $10,000) / 200,000

= $2.45. The cumulative preferred’s $10,000 dividend preference for the previous year that was paid in the current

year is not included in the calculation. The preferred dividends for the current year are included in the calculation,

regardless of whether they have been paid.

I got answer A, is the answer is wrong ? or I was wrong? Can anyone help ?

Step by step
BEC 75 2013/11
FAR 76 2014/10
AUD 87 2015/1
REG 83 2015/3

[taxgeek83]

What was your calculation that led to answer A?

[Anonymous]

For the preferred dividends, you subtract $10,000 (250,000*4%), NOT the dividends paid. You do not subtract what was paid, just the preferred dividends owed. I'm a little rusty, but I hope that helps.

[yhe1223]

I used (500000-16000)/200000=2.42, so if this is not right, that means I can only deduct 4%*10*25000=10000 from NI?

One more question,if we are given the tax rate, do we need to calculate the after tax NI and divided by shares?

Step by step
BEC 75 2013/11
FAR 76 2014/10
AUD 87 2015/1
REG 83 2015/3

[taxgeek83]

Nevermind, I see how you got it. You should be calculating the amount of preferred dividends that accumulated during the current year:

25,000 x $10 x 4% = $10,000

The $16,000 in dividends paid could be dividends in arrears, could include current year dividends, or could be a combination of both. Regardless, basic EPS takes into account only current year dividends. So final calculation is:

($500,000 – $10,000)/200,000 = $2.45

Does that make sense?

[taxgeek83]

I believe the income tax rate is only taken into account when calculating diluted EPS because you are subtracting interest net of income tax, but someone please correct me if I'm wrong….

[yhe1223]

Yes, totally make sense, thank you!!

Step by step
BEC 75 2013/11
FAR 76 2014/10
AUD 87 2015/1
REG 83 2015/3

[Anonymous]

Also, remember that NET income means after tax. “Income Before Taxes – Taxes = Net Income”

[Whopper Warrior]

The key word is cumulative. 0 paid or 100,000 paid. You would have to deduct the 10,000. I believe non cumulative would be the 16k as you subtract when declared.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[kaywalee]

Points to consider when doing these types of problems:

Formula for Basic EPS, and understanding the key words since the questions add in irrelevant information to just trick you.

Recalling, that cumulative PS is subtracted whether declared or not for the current year.

Finally, Passed FAR after many attempts, and it all boils down to understand your material.

Good Luck!

[fuzyfro89]

Other said it already, but you subtract preferred dividends attributable to the current period, NOT the dividends paid during the current period. Example is if they are “declared” in December of Y1 and paid in January of Y2.

As far as taxes goes, this is a good example of reading the question carefully. They will often give you more information than you need. In this case, they could have left the tax rate out since they already give you Net Income… but throw it in to also make sure you know what Net Income is and how it relates to EPS.

[Author]

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