[12tang]

Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding = $250,000

CS $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?

Why would you use $10,000 for deduction from income and not the paid $16,000? I understand that 10k is owed from the prior year but they have paid out 6k more. That is 6k less on top of the owed 10k that the common shareholders won’t see.

Using Becker self-study
FAR: (82) 175 hours - 1st attempt
BEC: (XX)
AUD: (69) 45hrs of study - 1st attempt
REG: (XX)

[JohnWayneIsGod]

The preferred dividend declared for Year 2 is equal to the product of its preferred dividend outstanding and the stated percentage. $250000*.04=$10,000

EPS subtracts money not attributable to common stockholders from net income. This includes dividends declared, but not yet paid. To not do so would overstate Basic EPS in a given year since the preferred dividends declared will never become available to common stockholders. In your question to calculate EPS, $10k was declared and subtracted from Net Income in Year 2, and $6k was must have been declared and subtracted from Net Income in Year 1.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Lidis]

Hi,

According to NINJA 2015 Notes:

If dividends are cumulative, subtract the P/S dividend

regardless of whether or not they’re declared.

If dividends are in arrears from a prior year on P/S,

don’t subtract that amount.

The prior year P/S cumulative dividend reduces that

year’s EPS. Only deduct the current year

[12tang]

So with cumulative PS you ONLY deduct what the percentage is for the current year? Any circumstances where this will not work?

Using Becker self-study
FAR: (82) 175 hours - 1st attempt
BEC: (XX)
AUD: (69) 45hrs of study - 1st attempt
REG: (XX)

[JohnWayneIsGod]

Yes. The only variation I'd expect to see is if the question stem asked a different question such as ‘what is dividends in arrears'. However for calculating basic EPS, the above is how it works. Not sure if it is ok to post Youtube links from Roger lessons, but he gives a good explanation in a Youtube video titled (16.01) Earnings Per Share: Basic – Lesson 2. Video is under 7 minutes.

FAR - 80

Courage is being scared to death, but saddling up anyway.

-John Wayne

[Author]

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