Question

For the year ended December 31, 2016, Harvest Productions Inc. earned $4,000,000. Outstanding preferred shares included $400,000 in 3% cumulative preferred shares issued on January 1, 2015 and $500,000 in 2% non-cumulative preferred shares issued on January 1, 2016. Dividends on the cumulative preferred shares were not declared in 2015. On December 15, 2016, Harvest declared and paid $24,000 in dividends on the 3% cumulative shares including the arrears. Harvest also declared and paid the $10,000 dividends on the non-cumulative shares.

Required:

Determine the net income available to ordinary shareholders for the year ended December 31, 2016.

Answer 1

The Net Income available for ordinary/Common Stakeholders is the Net profit after tax less any preference dividends paid during the year

Preference shares

3% Cumulative Preference share (issued on January 1,2015) =$400,000

2% Non-Cumulative Preference shares (Issued on January 1, 2016)=$500,000

As per the companies act 2013, for calculating Earnings per share(Net income available to equity shareholders/No.of equity shares)

The preference dividends should be deducted -

1.If it is declared and paid for the current year in respect of non-Cumulative preference shares

2.The full amount of Cumulative preference dividend for the current period whether it was provided or not. Cumulative preference dividend to be deducted does not include the dividend paid during the year relating to the previous periods

So, here in respect of 2% Non-cumulative preference shares dividend paid for the period, January 2015-December 2015 period dividend should not be taken into consideration for determining the net income available to ordinary shareholders

Total Preference dividend to be deducted:

3% cumulative preference shares =$400,000*3%(for 2016 only)=$12,000

2% Non-cummulative preference shares=$500,000*2%=$10,000

Total preference dividend to be deducted=$22,000

Net income available to ordinary share holders for the year ended 31st december 2016 =$400,00(Net profit)(-) $22,000(Preference dividend)

=$378,000