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Chapter 13: Problem 23

Crystal Arts, Inc., had earnings of \(\$ 160,000\) for 2010 . The company had 20,000 shares of common stock outstanding during the year. In addition, the company issued 2,000 shares of \(\$ 100\) par value preferred stock on January 3,2010 . The preferred stock has a dividend of \(\$ 7\) per share. There were no transactions in either common or preferred stock during \(2010 .\) Determine the basic earnings per share for Crystal Arts.

Short Answer

Expert verified
The basic earnings per share for Crystal Arts is \( \$7.30 \).

Step by step solution

01

Calculate Total Preferred Dividends

First, we need to calculate the total preferred dividends for the year. Since the preferred stock has a dividend of \( \\(7 \) per share and there are 2,000 shares, we calculate: \( 2,000 \times 7 = \\)14,000 \).
02

Determine Earnings Available to Common Shareholders

Next, subtract the total preferred dividends from the total earnings to find the earnings available to common shareholders. We calculate: \( \\(160,000 - \\)14,000 = \$146,000 \).
03

Calculate Basic Earnings Per Share (EPS)

Now, we calculate the basic earnings per share (EPS) by dividing the earnings available to common shareholders by the number of common shares outstanding: \( \frac{\\(146,000}{20,000} = \\)7.30 \).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Preferred Dividends
Preferred dividends are payouts that companies promise to preferred shareholders before common shareholders receive any dividends. This is because preferred shares typically have a set dividend rate that must be honored.
In the example of Crystal Arts, Inc., the preferred stock carries a dividend rate of $7 per share.
  • With 2,000 preferred shares outstanding, the company is obligated to pay a total of \(2,000 \times 7 = 14,000\) in dividends to preferred shareholders each year.
  • This prioritized obligation impacts the earnings that are available for common shareholders, which is crucial when calculating Basic Earnings Per Share (EPS).
Understanding preferred dividends is vital because those amounts are deducted from total earnings before distributing any profit to common shareholders.
Common Shareholders
Common shareholders are the owners of common stock in a company, like Crystal Arts. They are essentially the true owners of the company, as they hold the rights to vote on corporate matters and receive a portion of the company's profits. However, their dividends are paid after preferred shareholders receive their guaranteed payouts.
This hierarchy is significant because:
  • For Crystal Arts, the earnings available to common shareholders are calculated after satisfying the preferred dividend requirement.
  • In the scenario given, there were 20,000 shares of common stock outstanding throughout 2010, so earnings per share directly affect these shareholders.
Ultimately, understanding the role of common shareholders is critical because their dividends will vary based on the company鈥檚 remaining earnings, unlike fixed-rate preferred dividends.
Earnings Calculation
The calculation of earnings available for each type of shareholder is an important component in understanding a company's financial health. First, we derive the total earnings available for common shareholders after paying off preferred dividends.
  • Crystal Arts starts with total earnings of \(160,000\).
  • Next, the obligation to pay preferred dividends means \(14,000\) must be deducted from these earnings, leaving \(146,000\) available for common shareholders.
This amount is then divided by the number of common stock shares to find the Basic Earnings Per Share (EPS), a key metric of financial performance.
  • In this example, dividing \(146,000\) by 20,000 gives the EPS of \(7.30\), indicating the profit earned per share of common stock.
This calculation highlights the impact of preferential payouts on the earnings per share for common shareholders, making it a vital exercise for investors and accountants alike.

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Most popular questions from this chapter

Fairmount Inc., a developer of radiology equipment, has stock outstanding as follows: 15,000 shares of cumulative \(2 \%\), preferred stock of \(\$ 150\) par, and 50,000 shares of \(\$ 5\) par common. During its first four years of operations, the following amounts were distributed as dividends: first year, \(\$ 30,000\); second year, \(\$ 42,000\); third year, \(\$ 90,000\); fourth year, \(\$ 120,000\). Calculate the dividends per share on each class of stock for each of the four years.

Augusta Gardens Inc. develops and produces spraying equipment for lawn maintenance and industrial uses. On August 30 of the current year, Augusta Gardens Inc. reacquired 17,500 shares of its common stock at \(\$ 42\) per share. On October \(31,14,000\) of the reacquired shares were sold at \(\$ 45\) per share, and on November \(10,2,000\) of the reacquired shares were sold at \(\$ 48\). a. Journalize the transactions of August 30 , October 31, and November 10 . b. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year? c. What is the balance in Treasury Stock on December 31 of the current year? d. How will the balance in Treasury Stock be reported on the balance sheet?

Selected transactions completed by Hartwell Boating Supply Corporation during the current fiscal year are as follows: Feb. 3. Split the common stock 2 for 1 and reduced the par from \(\$ 40\) to \(\$ 20\) per share. After the split, there were 250,000 common shares outstanding. Apr. 10. Declared semiannual dividends of \(\$ 1.50\) on 18,000 shares of preferred stock and \(\$ 0.08\) on the common stock to stockholders of record on May 10 , payable on June \(9 .\) June 9. Paid the cash dividends. Oct. 10. Declared semiannual dividends of \(\$ 1.50\) on the preferred stock and \(\$ 0.04\) on the common stock (before the stock dividend). In addition, a \(2 \%\) common stock dividend was declared on the common stock outstanding. The fair market value of the common stock is estimated at \(\$ 36\). Dec. 9. Paid the cash dividends and issued the certificates for the common stock dividend. Journalize the transactions.

Mia Restaurant Corporation wholesales ovens and ranges to restaurants throughout the Southwest. Mia Restaurant Corporation, which had 40,000 shares of common stock outstanding, declared a 4 -for-1 stock split (3 additional shares for each share issued). a. What will be the number of shares outstanding after the split? b. If the common stock had a market price of \(\$ 300\) per share before the stock split, what would be an approximate market price per share after the split?

On February 10, Peerless Rocks Inc., a marble contractor, issued for cash 40,000 shares of \(\$ 10\) par common stock at \(\$ 34\), and on May 9 , it issued for cash 100,000 shares of \(\$ 5\) par preferred stock at \(\$ 7\). a. Journalize the entries for February 10 and May \(9 .\) b. What is the total amount invested (total paid-in capital) by all stockholders as of May 9?
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