Question

Problem Set 1: 011-020 (Total 30 pts.: 3 pts each) CLEARLY indicate on your scantron the BEST answer to each of the following questions Assume that the following data relative to Kane Company for 2018 is available: Net Income tax rate of 40%) $2,100,000 Change Cumulative Transactions in Common Shares 700.000 Jan. 1. 2018, Beginning number (60,000) 640.000 Mar. 1. 2018, Purchase of treasury shares 640.000 1.280.000 June 1, 2018, Stock split 2-1 120,000 1.400,000 Nov. 1. 2018, Issuance of shares 8% Cumulative Convertible Preferred Stock Sold at par, convertible into 200,000 shares of common (adjusted for split). $1,000,000 Stock Options Exercisable at the option price of $25 per share. Average market price in 2018, $30 (market price and option price adjusted for split). 60,000 shares Convertible Bonds On March 1, 2018, issued 15 year, S600,000, 10% bonds at par to yield 10%. Face value $1,000 per bond. Each bond can be converted into 90 shares of common stock. (adjusted for split). 11. In determining basic earnings per share, dividends on nonconvertible cumulative preferred stock should be a. disregarded. b. deducted from net income only if the preferred stock is convertible. c. deducted from net income only if the preferred stock is noncumulative. d. deducted from net income if the preferred stock is cumulative. 12. In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are a. weighted by the number of days outstanding. b. weighted by the number of months outstanding. c. considered outstanding at the beginning of the year. d. disregarded. 13. What is the weighted number of shares of common stock outstanding in the calculation of basic EPS for 2018? a. 1,005,000 b. 1,043,333 c. 1,320,000 d. 1,400,000

Answer 1

11. d) deducted from net income if the preferred stock is cumulative.

The requirement is to determine the treatment of nonconvertible cumulative preferred dividends in determining basic EPS. Dividends on nonconvertible cumulative preferred shares should be deducted from net income whether an actual liability exists or not, because cumulative preferred stock owners must receive any dividends in arrears before future dividend distributions can be made to common stockholders