Question

At December 31, 2012 Rice Company had 300,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2012 or 2013. On January 30, 2014, prior to the issuance of its financial statements for the year ended December 31, 2013, Rice declared a 100% stock dividend on its common stock. Net income for 2013 was $1,140,000. In its 2013 financial statements, Rice's 2013 earnings per common share should be ____________.

Answer 1

Rice Company's 2013 earnings per common share, after adjusting for the 100% stock dividend and the preferred stock dividends in arrears, should be $1.70 per share.

Step-by-step explanation:

To calculate the earnings per share (EPS) for Rice Company in 2013, given a 100% stock dividend in 2014, you must adjust prior year EPS calculations to account for the change in the number of outstanding shares. This type of dividend doubles the outstanding shares. Therefore, the original 300,000 shares outstanding in 2013 would be restated as 600,000 shares.

Next, as the preferred stock is cumulative, the dividends should be considered as well. With 10,000 shares of 6%, $100 par preferred stock, this amounts to an annual dividend of $60,000 (0.06 x $100 x 10,000). No dividends were paid in 2012 or 2013, so we assume that the dividends that should have been paid are in arrears and must be subtracted from the net income for 2013 before computing the EPS for common stock. For two years, this totals $120,000 (2 x $60,000).

Subtracting the cumulative preferred dividends from the net income gives us $1,020,000 ($1,140,000 - $120,000). The EPS for 2013 is then $1,020,000 / 600,000, equaling $1.70 per share.