1. in determining diluted earings per share, dividends on nonconvertible cumulat

ID: 2600173 • Letter: 1

Question

1. in determining diluted earings per share, dividends on nonconvertible cumulative preferred should be

a. disregarded

b.added back to net income whether declared or not

c. deducted from net income only if declared

d. deducted from net income whether declared or not

2. Bush inc. had the following capital structure during 2014:

Convertible preferred stock, $10 par, 4% noncumulative, 25,000 shares issued and outstanding, convertible to 2 shares of common stock.

Common stock, $5 par, 200,000 shares issued and outstanding.

Bush had $500,000 net income for 2014 and paid the preferred dividends. What amount should Bush report as EPS?

a. $2.00

b.$2.45

c. $2.50

d. $2.55

3. See above, What is the weighted average of shares outstanding ?

4. presented below is pension information for Welch Company for the year 2018:

12/31/2017 12/31/2018

actual return on plan assets 2,490,000 3,335,000

Fair Value of plan assets 2,600,000 2,870,000

Nye's contribution was $315,000 in 2018 and benefits paid were $235,000.

a. 170,000

b.190,000

c.245,000

d.270,000

5. Presented below is pension information for Welch Company for the year 2018:

Actual Return on plan assets 24000

service cost 30,000

interest cost 21,000

amortization of prior service cost 18,000

The amount of pension expense to be reported for 2018 is :

a.93,000

b.69,000

c.60,000

d.45,000

Explanation / Answer

Solution:

In determining diluted earnings per share, dividends on nonconvertible cumulative preferred should be d. deducted from Net Income whether declared or not.

Hence the correct option is d. deducted from Net Income whether declared or not.

Non Convertible cumulative preferred share has no potential impact on number of shares but the dividend on cumulative preferred share has the potential impact on earnings. Since cumulative preferred shareholders are entitled for preferred shares each year whether company has income or loss on any particular or each year. the dividend should be deducted from Net Income whether declared or not in determining the Diluted Earnings per share.

Calculation of EPS of Bush Inc for year 2014

Net Income for 2014

$500,000

Less: Dividend to Preferred Stockholders

(25,000 Shares x $10 each x 4%)

($10,000)

Earnings available to Common Stockholders

$490,000

Number of Weighted Average of shares outstanding Common Stock outstanding

200,000 Shares

EPS

(Earnings available to Common Stockholders / Number of Weighted Average of shares outstanding )

$2.45

($490,000 / 200,00 Shares)

Hence, the correct option is b. $2.45

3) Weighted Average of shares outstanding = 200,000 Shares

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