Question

Computing EPS: Simple Capital Structure

At the end of 2020, the records of Block Corporation reflected the following.

Common stock, $5 par, authorized 500,000 shares
Outstanding January 1, 2020, 400,000 shares		$2,000,000
Sold and issued April 1, 2020, 2,000 shares		10,000
Issued 5% stock dividend, September 30, 2020; 20,100 shares		100,500
Preferred stock, 6%, $10 par, nonconvertible, noncumulative, authorized 50,000 shares
Outstanding during year, 20,000 shares		200,000
Paid-in capital in excess of par, common stock		180,000
Paid-in capital in excess of par, preferred stock		100,000
Retained earnings (after the effects of current preferred dividends declared during 2020)		640,000
Bonds payable, 6.5%, nonconvertible, issued at par January 1, 2020		1,000,000
Net income		164,000
Income tax rate, 25%

a. What EPS presentation is required—basic, diluted, or both?

Basic

b. Compute the required EPS amount(s).

• Note: Round earnings per share amount to two decimal places.

	Net Income Available to Common Stockholders	Weighted Avg. Common Shares Outstanding	Per Share
Basic EPS	Answer	Answer	Answer

c. Compute the required EPS amount(s), assuming that the preferred stock is cumulative.

• Note: Round earnings per share amount to two decimal places.

	Net Income Available to Common Stockholders	Weighted Avg. Common Shares Outstanding	Per Share
Basic EPS	Answer	Answer	Answer

Answer 1

a. What EPS presentation is required—basic, diluted, or both?

Ans: Basic

b. Compute the required EPS amount(s).

Basic EPS = Net Income Available to Common Stockholders / Weighted Avg. Common Shares Outstanding

Net Income Available to Common Stockholders = Net income - Preferred dividend

Net income = 164000

Preferred dividend = 200000* 6% = 12000

Net Income Available to Common Stockholders = 164000 - 12000 = 152000

Weighted Avg. Common Shares Outstanding

Date	Share O/S	Weight	Weighted Average
Jan 01,2020	400000	3/12	100000
Apr 01, 2020	402000	6/12	201000
Sep 30, 2020	422100	3/12	105525
.	.	Total	406525

Basic EPS = 152000 / 406525 = 0.37 per share

c. Compute the required EPS amount(s), assuming that the preferred stock is cumulative.

Answer is same above,

Because, if the preferred stock is cumulative or non-cumulative, if dividend declared, should deduct the preferred dividend from Net income to calculate Net Income Available to Common Stockholders.

In above the preferred stock is non cumulative, but the question says the current preferred dividends was declared.

If it is cumulative preferred stock, not need to says the declaration of dividends, must deduct preferred dividends from Net income to calculate Net Income Available to Common Stockholders, dividends id declared or not, whatever it is.