Question

P16.6 (LO 4) (Basic EPS: Two-Year Presentation) Melton Corporation is preparing the comparative 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 common 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 structure, and explain why. b. Determine the weighted average number of shares that Melton Corporation would use in calculating 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.

Answer 1

Answers:

a. Melton Corporation has a simple capital structure as it doesn't have any potentially dilutive shares.

b.Weighted Average Number of Shares :

1 . May 31, 2020 : 1,600,000

2. May 31, 2021 : 2,200,000

Calculation:

1.

	Dates Outstanding	Shares Outstanding	Restatement	Fraction of year	Weighted Shares
Beginning balance	June 1 - Oct1	1,000,000	1.2	4/12	400,000
New Issue	Oct 1 - May 31	1,500,000	1.2	8/12	1,200,000
					1,600,000

2.

	Dates Outstanding	Shares Outstanding	Restatement	Fraction of year	Weighted Shaes
Beginning balance	June 1 - Dec 1	1,800,000		6/12	900,000
New Issue	Dec 1 - May 31	2,600,000		6/12	1,300,000
					2,200,000

c.

MELTON CORPORATION
Comparative Income statement For fiscal yearsended May 31, 2020 and 2021
	2020	2021
Income from Operations	1,800,000	2,500,000
Interest Expense	240,000	240,000
Income before tax	1,560,000	2,260,000
Income tax 20%	312,000	452,000
Income before extraordinary item	1,248,000	1,808,000
Extraordinary loss, net of income taxes	0	480,000
Net Income	1,248,000	1,328,000

Earnings Per Share:
Income before extraordinary loss	0.74	0.79
Extraordinary loss		0.22
Net Income	0.74	0.58

Notes:

Interest Expense= 2,400,000 * 10% = 240,000

Extraordinary loss, net of income taxes = 600,000 - 600,000*20% = 480,000

Preferred Dividends = 20,000*50*6% = 60,000

Earnings Per Share = (Net Income - Preferred Dividends)/ Weighted Average Number of Shares

EPS 2020 = (1,248,000 - 60000)/1,600,000 = 0.74

EPS 2021 (Income before extraordinary loss) = (1,808,000 - 60,000)/2,200,000 = 0.79

EPS 2021 (Extraordinary loss) = (480,000-60,000)/2,200,000 = 0.22

EPS 2021 = (1,328,000-60,000)/2,200,000 = 0.58