Question

The Tarzan Company began business on 1/1/2016 when they issued the following;
	1000 shares of 200 par 8% preferred stock for $200,000
	100,000 shares of $3 par common stock for $500,000
In 2016 Tarzan reported income of $85,000
In 2017 Tarzan reported income of $40,000
Tarzan did not pay any dividends in 2016
In 2017 Tarzan paid a dividend of $68,000
Part 1: If the preferred stock is non-cumulative non-participating how is the $68,000 dividend divided between common and preferred stockholders (total dollars not per share)
	What is Tarzan's earnings per share for 2016?
	What was Tarzan's earnings per share for 2017?
Part 2: If the preferred stock is cumulative non-participating, how is the $68,000 dividend divided between common and preferred stockholders (total dollars not per share)
	What was Tarzan's earnings per share for 2016?
	What was Tarzan's earnings per share for 2017?

Answer 1

Part 1: Non-cumulative preference shares

Division of dividend between preferred stockholders and common stockholders:

Dividend declared in 2017 = $68,000

Preferred stockholders portion = $200,000 x 8% = $16,000

Common stockholders portion = ($68,000 - $16,000) = $52,000

Calculation of earning per share:

2016 2017

a. Income $85,000 $40,000

b. Preffered dividend Nil $16,000 (= $200,000 x 8%)

c. Earning available for common stockholders $85,000 $24,000

(a-b)

d. Outstanding common shares 100,000 shares 100,000 shares

E. Earning per share = (c ÷ d) 0.85 per share 0.24 per share

**Note- If noncumulative preferred shares are issued, only the preferred dividends that are actually declared must be subtracted from net income.   

Part 1: Cumulative preference shares

Division of dividend between preferred stockholders and common stockholders:

Dividend declared in 2017 = $68,000

Preferred stockholders portion = ($200,000 x 8%) x 2 years = $32,000

Common stockholders portion = ($68,000 - $32,000) = $36,000

Calculation of earning per share:

2016 2017

a. Income $85,000 $40,000

b. Preffered dividend $16,000 $16,000 (= $200,000 x 8%)

c. Earning available for common stockholders $69,000 $24,000

(a-b)

d. Outstanding common shares 100,000 shares 100,000 shares

E. Earning per share = (c ÷ d) 0.69 per share 0.24 per share

** Note- If cumulative preferred shares are issued, all preferred dividends whether declared or not must be subtracted from net income to establish the earnings available to common shareholders.

Hope this is useful and thank you!!!!!