Question

At the end of 2016, the records of SouthCo showed the following:

Bonds payable 8%, non-convertible		$370,000
Preferred shares:
Class A, no-par, 70 cents, non-convertible, non-cumulative, outstanding 60,000 shares (no dividend declared)		390,000
Class B, no-par, 50 cents, non-convertible, cumulative, outstanding 30,000 shares		690,000
Common shares, no-par, authorized unlimited shares:
Outstanding, January 1, 2016, 168,000 shares	$1,730,000
Retired shares, August 1, 2016, 39,000 shares	(339,745)
Issued, 150% stock dividend on September 1, 2016, on outstanding shares (193,500 additional shares)		1,390,255
Retained earnings (no dividends declared)		1,790,000
Income before discontinued operations		147,781
Discontinued operations, net of tax		30,350
Net income		$178,131

Average income tax rate, 30%.

a) Calculate the preferred dividend claims. (Use 0 when the condition does not apply.) Please make sure your final answer(s) are accurate to the nearest whole number.

class a

class b

b) Calculate the weighted average number of common shares (WACS). Please make sure your final answer(s) are accurate to the nearest whole number.

jan 1 2016-july 31 2016

aug 1 2016- aug 31 2016

sep 1 2016- dec 31 2016

c) Calculate the earnings per share on common shares (EPS). Please make sure your final answer(s) are accurate to 2 decimal places.

Earnings per share on common shares:

Income before discontinued operations

Discontinued operations

Net income

Answer 1

a) Calculate the preferred dividend claims. (Use 0 when the condition does not apply.) Please make sure your final answer(s) are accurate to the nearest whole number.

.

class a = 0

.

Because it is non-cumulative dividend, and no dividend declared, so there is no claim for dividend

.

class b = 30000 * $0.50 = $15000

.

It is cumulative preference share, so must deduct from Net income, weather dividend declared or not, Because, in future year it should pay before any common dividend paid.

.

b) Calculate the weighted average number of common shares (WACS).

.

jan 1 2016-july 31 2016 = 168000 * 12 / 12 = 168000 share

aug 1 2016- aug 31 2016 = 39000 * 5 / 12 =   (16250) share

sep 1 2016- dec 31 2016 =   150% …………..193500 (given )

weighted average number of common shares (WACS ) = 345250

.

c) Calculate the earnings per share on common shares (EPS).

.

Earnings per share on common shares:

.

> Income before discontinued operations

.

Basic EPS = (Income before discontinued operations - Preferred dividend ) / WACS

.

Basic EPS = ( 147781 - 15000 ) / 345250

EPS = 132781 / 345250 = $0.38 per share

.

> Discontinued operations

.

EPS = Income from Discontinued operations / WACS

.

EPS = 30350 / 345250 = $0.09 per share

.

> Net income

.

EPS = (Net income - Preferred dividend ) / WACS )

.

EPS = ( 178131 - 15000 ) / 345250

EPS = 163131 / 345250 = $0.47 per share