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 The preferred stock is not convertible. 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?

Question

Business

Kody Alexander

12 December, 07:10

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 The preferred stock is not convertible. 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?

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Answers (1)

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Marsh · Answer 1

Basic Earnings Per Share = $2.45

Explanation:

Expectation: Calculate the Basic Earnings per Share

First, what is the net income for the year = $500,000

Preference dividend = $16

However, since the preference share is cumulative and no preference dividend was paid in the first year. It means the preference dividend of $16,000 paid was both for the first and second year

Hence, preference dividend for the second year = 4% x $250,000 = 0.04x $250,000 = $10,000

As such the Basic earning per share

= (Net income - Preference Dividend for the year 2) / Outstanding common shares

= ($500,000 - $10,000) / 200,000 shares

=$2.45