Caspela Corp had the same capital structure in 2017 and 2018

Caspela Corp. had the same capital structure in 2017 and 2018, consisting of the following:

Preferred stock, $12 par, 5% cumulative,

20,000 shares issued and outstanding $ 240,000

Common stock, $6 par, 250,000 shares

issued and outstanding 1,500,000

Caspela reported net income of $600,000 for 2018. No preferred dividends were paid during 2017, but Caspela paid $20,000 in preferred dividends in 2018. In its 2018 income statement what amount should Caspela report as basic earnings per share?

Multiple Choice

$2.37

$2.30

$2.35

$2.32

Solution

Basic Earnings per share = Income available to common stockholders /  weighted-average number of common shares outstanding

Income available to common stockholders = Net income - Dividends on cumulative preferred stock (accumulated for the period)

Here, Net Income = $600,000

Preference Dividends = $20000 (cumulative) - assumed as accumulated

So, Income available to common stock holders = $600,000- $20000 = $580,000

Weighted average number of common stock = 250000 as capital structure remained the same in 2017 and 2018

So, Basic Earnings per share = $580000/250000 = $2.32

The amount to be reported as Earnings per share in Caspela Report is $2.32 as Basic Earnings per share