Your client XXXX Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2012, and May 31, 2013. She is just a little late getting married and divorced, busy year. The income from operations for each year was $1,800,000 and $2,500,000, respectively. In both years, the company incurred a 10% interest expense on $2,400,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss of $500,000 from a fire in its Scotland facility in February 2013, which was determined to be an extraordinary loss. The company uses a 40% effective tax rate for income taxes.
The capital structure of XXXX Corporation on June 1, 2011, consisted of 2 million shares of common stock outstanding and 20,000 shares of $50 par value, 8%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants. On October 1, 2011, XXXX sold an additional 500,000 shares of the common stock at $20 per share. XXXX distributed a 20% stock dividend on the common shares outstanding on January 1, 2012. On December 1, 2012, XXXX was able to sell an additional 800,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years.
Ms. XXXX has come to you with some questions. She wants you to answer the following questions in writing.
a. Identify whether the capital structure at XXXX Corporation is a simple or complex capital structure, and explain to her why.
b. Determine the weighted average number of shares that XXXX Corporation would use in calculating earnings per share for the fiscal year ended
1. May 31, 2012.
2. May 31, 2013.
c. Prepare, in good form, a comparative income statement, beginning with income from operations, for XXXX Corporation for the fiscal years ended May 31, 2012, and May 31, 2013. This statement will be included in XXXX annual report and should display the appropriate earnings per share presentations.