Question

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?

Answer 1

Answer:

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