Question

Poe Co. had 300,000 shares of common stock issued and outstanding at December 31, Year 1. No common stock was issued during Year 2. On January 1, Year 2, Poe issued 200,000 shares of nonconvertible preferred stock. During Year 2, Poe declared and paid $75,000 of cash dividends on the common stock and $60,000 on the preferred stock. Net income for the year ended December 31, Year 2, was $330,000. What should be Poe’s Year 2 basic earnings per common share?

Answer 1

Poe's Year 2 Basic Earnings per share = $0.9

Step-by-step explanation:

Provided Year 2 Net income = $330,000

Cash dividend paid to preference shares = $60,000

Net earnings available for equity = $330,000 - $60,000 = $270,000

Now outstanding common equity = 300,000 shares

Earnings per share = $270,000/300,000 = $0.9 per share

Note: Dividend paid to common stock is also earnings of common stock, that is dividend is part of common stock.

Therefore dividend paid to common stock will not be deducted and preference shares are paid in priority to equity, therefore dividend to preference is deducted to get the value of earnings available for equity.

Final Answer

Poe's Year 2 Basic Earnings per share = $0.9