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ACCA Strategic Professional · Strategic Business Reporting (International) · Presentation and disclosure in financial statements

Lambda plc has profit for the year of $1,800,000 and 5,000,000 ordinary shares. It also has 500,000 cumulative 6% preference shares of $2 each, classified as equity; no preference dividend was declared in the year. Which figure is the correct earnings used in basic EPS?

Earnings for basic EPS are $1,740,000. Cumulative preference dividends on equity-classified shares are deducted from profit for the period whether or not declared. The dividend is $60,000 (500,000 shares x $2 x 6%), so $1.8m less $60,000 gives $1.74m.

  1. A$1,800,000
  2. B$1,740,000Correct
  3. C$1,860,000
  4. D$1,680,000

Explanation

For cumulative preference shares classified as equity, the dividend for the period is deducted whether or not declared. Dividend = 500,000 x $2 x 6% = $60,000. Earnings = 1,800,000 - 60,000 = $1,740,000. Not deducting it ($1,800,000) ignores the cumulative entitlement.

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