Question

At December 31, 2010 Pine Company had 200,000 shares of common stock and 10,000 shares of 4%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2010 or 2011. On February 10, 2012, prior to the issuance of its financial statements for the year ended December 31, 2011, Pine declared a 100% stock split on its common stock. Net income for 2011 was $720,000. In its 2011 financial statements, Pine's 2011 earnings per common share should be

a. $3.40.
b. $3.20.
c. $1.70.
d. $1.00.

Answer 1

The 2011 earnings per common share that should be reported by Pine Company is $3.20. This is calculated by subtracting the cumulative preferred dividends in arrears from the net income and dividing by the number of common shares, adjusted for the stock split.

Step-by-step explanation:

Direct answer in 2 lines: The correct 2011 earnings per common share that Pine should report is $3.20 (Option b).

To calculate the earnings per share (EPS), we must consider that preferred dividends have not been paid in 2010 or 2011 and are thus in arrears, as the preferred stock is cumulative. For two years, this amounts to 10,000 shares × $100 par × 4% per year equal to $40,000 per year, totaling $80,000 for both years. Subtracting this from the net income of $720,000 leaves $640,000 available to common shareholders.

The stock split doubled the number of common shares from 200,000 to 400,000. Therefore, the 2011 EPS for common stock is calculated by dividing the $640,000 by the 400,000 shares, resulting in $1.60 per share. However, the stock split occurred in 2012, so for the 2011 financial statements, we use the pre-split share count of 200,000 to determine the reportable 2011 EPS. Thus, the $1.60 should be adjusted back to pre-split values by doubling it, which gives us $3.20 per share (Option b).