Can someone explain this question to me.
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.$2.50
b. $2.45
c.$2.48
d.$2.42
Explanation
Choice “b” 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.
My question is why didn't we subtract $20,000 from net income. The cumulative dividend for 2 yrs is 20000.
.