Question

0166 (LO4) (Basic EPS: Two-Year Presentation) Melton Corporation is preparing the compara- e financial statements for the annual report to its shareholders for fiscal years ended May 31, 2020, and May 31, 2021. The income from operations for the fiscal year ended May 31, 2020, was $1,800,000 and income from continuing operations for the fiscal year ended May 31, 2021, was $2,500,000. 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 from discontinued operations of $600,000 on February 2021. The company uses a 20% effective tax rate for income taxes. The capital structure of Melton Corporation on June 1, 2019, consisted of 1 million shares of com- mon stock outstanding and 20,000 shares of $50 par value, 6%, 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, 2019, Melton sold an additional 500,000 shares of the common stock at $20 per share. Melton distributed a 20% stock dividend on the common shares outstanding on January 1, 2020. On December 1, 2020, Melton 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. Instructions a. Identify whether the capital structure at Melton Corporation is a simple or complex capital struc- ture, and explain why. b. Determine the weighted average number of shares that Melton Corporation would use in calculat- ing earnings per share for the fiscal year ended: 1. May 31, 2020 2. May 31, 2021. c. Prepare, in good form, a comparative income statement, beginning with income from operations, for Melton Corporation for the fiscal years ended May 31, 2020, and May 31, 2021. This statement will be included in Melton's annual report and should display the appropriate earnings per share presentations. (CMA adapted)

Answer 1

The Capital structure at Melton Corporation is a simple capital structure because the company had not issued any dilutive securities. (a) (b) Weighted Average Number of Shares: 2021 2020 1,000,000 1,500,000 Opening Balance (1000000*12/12] 333,333 Add : Issued During the Year (500000*8/12] 400,000 Add : Issued During the Year [800000*6/12] 1,333,333 1,900,000

с. Melton Corporation Comparitive Income Statement For the month ended December 31, 2018 2020 2021 Income from Operations Interest Expense @ 10% 1,800,000 (240,000) 2,500,000 240,000 Income Before Taxes Income Taxes @ 20% 1,560,000 (312,000) 2,740,000 (548,000) Net Income from Continuing Operations Loss from Discontinued Operations 1,248,000 (600,000) 2,192,000 (600,000) Net Income / (loss) Preffered dividend 648,000 (60,000) 1,592,000 (60,000) Earnings attributtable to shareholders Weighted average no. of shares EPS (Earnings Attributable/Weighted Avg No. of Shares) 588,000 1,333,333 1,532,000 1,900,000 0.44 0.81