Question

In determining basic earnings per share, dividends on nonconvertible cumulative preferred stock should be:a. deducted from net income only if declaredb. deducted from net income whether declared or notc. added back to net income whether declared or notd. disregarded

Answer 1

Answer:

b. deducted from net income whether declared or not

Explanation:

The formula to compute the basic earning per share is shown below:

Basic earning per share = (Net income - preferred stock dividend) ÷ (weighted average of outstanding shares)

In the case of the non- convertible cumulative preferred stock, the dividend should be paid whether the business earns profit or loss. If the business does not earn any profit during a particular year, in that period the dividend amount is carried forward to next year.

So, the dividend arrears are to be paid to the cumulative preferred stock.