Question

Sheridan 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 $1,889,000 and income from continuing operations for the fiscal year ended May 31, 2021, was $2,530,000. In both years, the company incurred a 9% interest expense on $2,449,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss from discontinued operations of $606,000 on February 2021. The company uses a 20% effective tax rate for income taxes.

The capital structure of Sheridan Corporation on June 1, 2019, consisted of 962,000 shares of common stock outstanding and 20,500 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, Sheridan sold an additional 511,000 shares of the common stock at $20 per share. Sheridan distributed a 20% stock dividend on the common shares outstanding on January 1, 2020. On December 1, 2020, Sheridan was able to sell an additional 760,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years.

Part a. Identify whether the capital structure at Sheridan Corporation is a simple or complex capital structure.

Part b. Determine the weighted-average number of shares that Sheridan Corporation would use in calculating earnings per share for the fiscal year ended:

Part c.Prepare, in good form, a comparative income statement, beginning with income from operations, for Sheridan Corporation for the fiscal years ended May 31, 2020, and May 31, 2021. This statement will be included in Sheridan’s annual report and should display the appropriate earnings per share presentations. (Round earnings per share to 2 decimal places, e.g. $1.55.)

Answer 1

Part A)

In complex capital structure the company should have dilutive securities like options and warrants also they need to report EPS with diluted basis but the capital strucure of this company is simple because it has only issued common stock and preferred stock shares.

Part B)

01- june-19 Cumulative stock 20500

01- june-19 Common stock Outstanding 962000

01-jan-20 20% stock dividend(962000*20%)     192400   

01-jan-20 Common stcok ($20 per share) 511000

01-dec-20 Common stock ($22 per share) 760000

Total at the end 2021 2445900

Period Transaction no. of shares outstanding

jun-19 to dec-19 Opening balance 982500 07/12 573125

jan-20 to may-20 Dividend on 01-jan-2020 1685900 05/12 702459

Number of shares 2019-2021 1275584

jun-20 to dec-19 Opening balance 20201-2021 1685900 06/12 842950

dec-20 to may-21 Addition on 01-dec-2020 2445900 06/12 1222950

Number of shares 2020-2021 2065900

Part C)

Comparative Income Statement

2020 2021

Income from operations 1889000 2530000

Interest Expense (244900)     (244900)

Loss 0    606000

Income from Dividend 1644100 2891100

Dividend ( 20500*50)*6%    (60900) (60900)

Income Before Tax 1583200 2830200

Tax @ 20% (316640) (566040)

Net Income 1327460   2325060

EPS 1644100/1275584 2891100/2065900

= 1.28 OR 1.30 1.40