Question

Blossom Inc. presented the following data:

Net income		$5,500,000
Preferred shares: 48,000 shares outstanding, $100 par, 7% cumulative, not convertible		$4,800,000
Common shares: Shares outstanding, Jan. 1, 2020		639,000
Issued for cash, May 1, 2020		99,000
Acquired treasury shares for cash, Sept. 1, 2020 (shares cancelled)		138,000
2–for–1 stock split, Oct. 1, 2020

As of January 1, 2020, there were no dividends in arrears. On December 31, 2020, Blossom declared and paid the preferred dividend for 2020.

1) Calculate earnings per share for the year ended December 31, 2020

2) Assume that Blossom did not declare or pay a preferred dividend in 2020.

Calculate earnings per share for the year ended December 31, 2020

3) Assume that as at January 1, 2020, Blossom had two years of dividends in arrears, and that on December 31, 2020, Blossom declared and paid the dividends in arrears and the preferred dividend for 2020.

Calculate earnings per share for the year ended December 31, 2020.

4) Assume that the preferred shares are non-cumulative, and that the preferred dividend was paid in 2020.

Calculate earnings per share for the year ended December 31, 2020.

5) Assume that the preferred shares are non-cumulative, and that Blossom did not declare or pay a preferred dividend in 2020.

Calculate earnings per share for the year ended December 31, 2020.

Answer 1

Solution to Case 1:Earnings per share for the year ended December 31, 2020 when Blossom declared and paid the preferred dividend for 2020-

Basic Earnings Per Share=Profit Available for equity shareholders/weighted average number of equity share

Profit Available for Equity Shareholders-Net Income-Preference Dividend =5,500,000-(48000*100*7%) =51,64,000

Weighted Average Number of Equity Shares-

Note 1-Shares Issued and cancelled on the same date not to be considered

Common Shares outstanding from 1/1/20 to 30/09/20 639000*9/12 =479250 Add: Issued for cash outstanding from 01/05/20 to 30/09/20 99000*5/12 =41250 Add: 2-1 Stock Split of above on 01/10/20   ((639000+99000)*2)*3/12 =36900   

Total Weighted Average Number of Equity Shares=889500

Hence EPS=5164000/889500

= 5.81

Solution to Case 2:Earnings per share for the year ended December 31, 2020 when Blossomdid not declare and pay preferred dividend for 2020-

Weighted Average Equity shares will be same as part 1=889500

Note -2 Now, as per IAS 33 If the dividends are cumulative, then these preference dividends for the period are deducted from net profit or added to the net loss, irrespective of whether they are declared.In contrast, dividends on non-cumulative preference shares are not deducted in arriving at the numerator unless they have been declared by the reporting date.

In the given case,the preference dividend is cumulative hence shall be deducted and hence profit available to shareholders shall also be same as case 1=5164000.

Therefore EPS shall also remain same=5.81.

Solution to Case 3:Earnings per share for the year ended December 31, 2020 assuming that as at January 1, 2020, Blossom had two years of dividends in arrears, and that on December 31, 2020, Blossom declared and paid the dividends in arrears and the preferred dividend for 2020.

Assumption:Par value shares are $10 and dividend is 10%

Weighted Average Equity shares will be same as part 1=889500

Profit Available For Equity Shareholders:

Net Income 5,500,000 Less:Dividend In Arrears (639000*10*10%*2) 1,278,000 Less:Preference Dividend (48000*100*7%) 3,36,000 Profit Available For Equity Shareholders 3886000

EPS=3886000/889500

=4.37

Solution to part 4-Earnings per share for the year ended December 31, 2020 assuming that the preferred shares are non-cumulative, and that the preferred dividend was paid in 2020.

Weighted Average Equity shares will be same as part 1=889500

Profit Available For Equity Shareholders:

Net Income 5,500,000

Less:Preference Dividend (48000*100*7%) 3,36,000

Profit Available For Equity Shareholders 5,164,000

EPS=5164000/889500

= 5.81

Note 3: Dividends on non-cumulative preference shares are not deducted in arriving at the numerator unless they have been declared by the reporting date.In the given case dividend has been declared and paid and hence deducted from net income.

Solution to part 5:Earnings per share for the year ended December 31, 2020 assuming that the preferred shares are non-cumulative, and that Blossom did not declare or pay a preferred dividend in 2020.

Weighted Average Equity shares will be same as part 1=889500

Profit Available For Equity Shareholders will be same as Net Income=5,500,000

EPS=5500000/889500

= 6.18

Note 4: Dividends on non-cumulative preference shares are not deducted in arriving at the numerator unless they have been declared by the reporting date.In the given case dividend has been not declared and paid and hence not deducted from net income.