Accounting Question.. Earnings Per Share ?

I would go with B $1.60 EPS because the preferred shares are not equity but an obligation hence 7% of $2,000,000 is $140,000 and that obligation is deducted from the earnings before dividing the earnings by the 1.25 million shares of common stock. This leaves $2,000,000 in earnings to be divided amongst the 1.25 million common shares for $1.60 per share. It's important to realize that preferred shares are not partial ownership in the company simply a right to the stated dividend in this case 7% of the par value. I don't really see why they would pro-rate the earnings because of the additional issue of 500,000 shares in July 1, 2010, the effects of dilution are immediate.