Question

Whispering 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 $1,741,000 and income from continuing operations for the fiscal year ended May 31, 2021, was $2,605,000. In both years, the company incurred a 10% interest expense on $2,439,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss from discontinued operations of $591,000 on February 2021. The company uses a 20% effective tax rate for income taxes. The capital structure of Whispering Corporation on June 1, 2019, consisted of 957,000 shares of common stock outstanding and 19,600 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, Whispering sold an additional 505,000 shares of the common stock at $20 per share. Whispering distributed a 20% stock dividend on the common shares outstanding on January 1, 2020. On December 1, 2020, Whispering was able to sell an additional 824,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years. Identify whether the capital structure at Whispering Corporation is a simple or complex capital structure.

Answer 1

Answer:

1)

Simple Capital Structure doesn’t involve any Dilutive securities. Dilutive securities are those that offer the right to be converted to common stock, for eg: stock options, convertible debt, convertible preferred stock, warrants. Since Whispering Corporation has not issued any dilutive securities like convertible securities, options, and warrants as stated in the question, it has a Simple Capital Structure.

		No of Shares	Cumulative outstanding	Period of outstanding	Weighted no of Shares
1-Jun-2020	Common stock outstanding	957000	957000	4/12	319000
1-Oct-2020	Common stock sold	505000	1462000	8/12	974667
31-May-2021	Common stock outstanding	1462000			1293667
1-Jun-2021	Common stock outstanding	1462000	1462000	6/12	731000
1-Dec-2021	Common stock sold	824000	2286000	6/12	1143000
31-May-2022	Common stock outstanding	2286000			1874000

WhisperingCorporation Comparative Income Statement For Fiscal year Ending May 31, 2021 and 2022
	2021	2022
Income from Operations	1741000	2605000
Loss from discontinued operations		(591000)
Earnings before Interest & Taxes	1741000	2014000
Less: Interest expenses	(243900)	(243900)
Profit before Tax	1497100	1770100
Less: Tax @ 20%	299420	354020
Profit After Tax	1197680	1416080
Less: Dividend on 6% preferred stock	71861	84965
Profit available for common stock	1125819	1331115
Weighted average shares	1293667	1874000
Earnings per Share	0.87	0.71