C is corrent. The requirement is to compute basic earnings per share. The formula for basic earnings per share is (net income minus preferred dividends) divided by the weighted-average common shares outstanding. Although no dividends were declared during the year, the preferred dividend must be subtracted because the preferred stock is cumulative. The preferred dividend of $200,000 (10% × $2,000,000 par) must be subtracted in determining the numerator for basic earnings per share. Accordingly, this answer is correct because basic EPS is ($2,000,000 net income – $200,000 preferred dividends) ÷ 200,000 weighted-average common shares outstanding = $9.00 per share.
A is incorrect. The formula for basic earnings per share is (net income minus preferred dividends) divided by the weighted-average common shares outstanding. Although no dividends were declared during the year, the preferred dividend must be subtracted because the preferred stock is cumulative. The preferred dividend of $200,000 (10% × $2,000,000 par) must be subtracted in determining the numerator for basic earnings per share. Accordingly, this answer is incorrect because basic EPS is ($2,000,000 net income – $200,000 preferred dividends) ÷ 200,000 weighted-average common shares outstanding = $9.00 per share.
A is incorrect. The formula for basic earnings per share is (net income minus preferred dividends) divided by the weighted-average common shares outstanding. Although no dividends were declared during the year, the preferred dividend must be subtracted because the preferred stock is cumulative. The preferred dividend of $200,000 (10% × $2,000,000 par) must be subtracted in determining the numerator for basic earnings per share. Accordingly, this answer is incorrect because basic EPS is ($2,000,000 net income – $200,000 preferred dividends) ÷ 200,000 weighted-average common shares outstanding = $9.00 per share.
D is incorrect. The formula for basic earnings per share is (net income minus preferred dividends) divided by the weighted-average common shares outstanding. Although no dividends were declared during the year, the preferred dividend must be subtracted because the preferred stock is cumulative. The preferred dividend of $200,000 (10% × $2,000,000 par) must be subtracted in determining the numerator for basic earnings per share. Accordingly, this answer is incorrect because basic EPS is ($2,000,000 net income – $200,000 preferred dividends) ÷ 200,000 weighted-average common shares outstanding = $9.00 per share.
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