Question

Teal 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 $1,746,000 and income from continuing operations for the fiscal year ended May 31, 2021, was $2,459,000. In both years, the company incurred a 10% interest expense on $2,370,000 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 Teal Corporation on June 1, 2019, consisted of 976,000 shares of common stock outstanding and 19,700 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, Teal sold an additional 510,000 shares of the common stock at $20 per share. Teal distributed a 20% stock dividend on the common shares outstanding on January 1, 2020. On December 1, 2020, Teal was able to sell an additional 801,000 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 Teal Corporation is a simple or complex capital structure. Simple Capital StructureComplex Capital Structure

Determine the weighted-average number of shares that Teal Corporation would use in calculating earnings per share for the fiscal year ended: Weighted-average number of shares (1) May 31, 2020 (2) May 31, 2021

Prepare, in good form, a comparative income statement, beginning with income from operations, for Teal Corporation for the fiscal years ended May 31, 2020, and May 31, 2021. This statement will be included in Teal’s annual report and should display the appropriate earnings per share presentations. (Round earnings per share to 2 decimal places, e.g. $1.55.) TEAL CORPORATION Comparative Income Statement For Fiscal Years Ended May 31, 2020 and 2021 2020 2021 DividendsExpensesExtraordinary LossIncome Before Extraordinary LossIncome Before TaxesInterest ExpenseIncome From Continuing OperationsIncome From OperationsIncome TaxesLoss From Discontinued OperationsNet Income / (Loss)Retained Earnings, June 1Retained Earnings, May 31RevenuesTotal ExpensesTotal Revenues $ $ DividendsExpensesExtraordinary LossIncome Before Extraordinary LossIncome Before TaxesInterest ExpenseIncome From Continuing OperationsIncome From OperationsIncome TaxesLoss From Discontinued OperationsNet Income / (Loss)Retained Earnings, June 1Retained Earnings, May 31RevenuesTotal ExpensesTotal Revenues DividendsExpensesExtraordinary LossIncome Before Extraordinary LossIncome Before TaxesInterest ExpenseIncome From Continuing OperationsIncome From OperationsIncome TaxesLoss From Discontinued OperationsNet Income / (Loss)Retained Earnings, June 1Retained Earnings, May 31RevenuesTotal ExpensesTotal Revenues DividendsExpensesExtraordinary LossIncome Before Extraordinary LossIncome Before TaxesInterest ExpenseIncome From Continuing OperationsIncome From OperationsIncome TaxesLoss From Discontinued OperationsNet Income / (Loss)Retained Earnings, June 1Retained Earnings, May 31RevenuesTotal ExpensesTotal Revenues DividendsExpensesExtraordinary LossIncome Before Extraordinary LossIncome Before TaxesInterest ExpenseIncome From Continuing OperationsIncome From OperationsIncome TaxesLoss From Discontinued OperationsNet Income / (Loss)Retained Earnings, June 1Retained Earnings, May 31RevenuesTotal ExpensesTotal Revenues DividendsExpensesExtraordinary LossIncome Before Extraordinary LossIncome Before TaxesInterest ExpenseIncome From Continuing OperationsIncome From OperationsIncome TaxesLoss From Discontinued OperationsNet Income / (Loss)Retained Earnings, June 1Retained Earnings, May 31RevenuesTotal ExpensesTotal Revenues     Dividends    Expenses    Extraordinary Loss    Income Before Extraordinary Loss    Income Before Taxes    Interest Expense    Income From Continuing Operations    Income From Operations    Income Taxes    Loss From Discontinued Operations    Net Income / (Loss)    Retained Earnings, June 1    Retained Earnings, May 31    Revenues    Total Expenses    Total Revenues     $ $ Earnings per share: DividendsExpensesExtraordinary LossIncome Before Extraordinary LossIncome Before TaxesInterest ExpenseIncome From Continuing OperationsIncome From OperationsIncome TaxesLoss From Discontinued OperationsNet Income / (Loss)Retained Earnings, June 1Retained Earnings, May 31RevenuesTotal ExpensesTotal Revenues $ $ DividendsExpensesExtraordinary LossIncome Before Extraordinary LossIncome Before TaxesInterest ExpenseIncome From Continuing OperationsIncome From OperationsIncome TaxesLoss From Discontinued OperationsNet Income / (Loss)Retained Earnings, June 1Retained Earnings, May 31RevenuesTotal ExpensesTotal Revenues     Dividends    Expenses    Extraordinary Loss    Income Before Extraordinary Loss    Income Before Taxes    Interest Expense    Income From Continuing Operations    Income From Operations    Income Taxes    Loss From Discontinued Operations    Net Income / (Loss)    Retained Earnings, June 1    Retained Earnings, May 31    Revenues    Total Expenses    Total Revenues     $ $

Answer 1

(a) Teal corporation is having a simple capital structure since there are no potential dilutive shares.

(b) Computation of weighted average number of shares:

For the year 2020:

From June 1st to Oct 1st = 976,000 shares x 1.20 x 4/12 = 390,400 share

From October 1st to May 31st -= (976,000+510,000) shares * 1.20 * 8/12 = 1,188,800 shares

Total = 390,400 + 1,188,800 = 1,579,200 shares

For the year 2021:

From June 1st to December 1st = (976,000+510,000) x 1.20 x 6/12 = 891,600 share

From December 1st 2021 to May 31st 2022 =  {[(976,000+510,000) x 1.2 ] + 801,000 } * 6/12 =  1,292,100 shares

Total = 891,600 + 1,292,100 = 2,183,700 shares

(c) Comparative income statement:

Teal Corporation
Comparative Income Statement
For Fiscal Years Ending May 31, 2020 and 2021
	2020	2021
Income form Operations	1,746,000.00	2,459,000.00
Interest expense	244,600.00	244,600.00	(2,446,000*10%)
Income from continuing operations before tax	1,501,400.00	2,214,400.00
Income tax @ 20%	300,280.00	442,880.00
Income from continuing operations	1,201,120.00	1,771,520.00
Discotinued operations loss, Net of tax	-	472,800.00	(591,000*80%)
Net income	1,201,120.00	1,298,720.00
Earnings Per share:
Income form continuing operations	0.72	0.78	[(1,201,120-(19,700*50*6%)] / 1,579,200	[(1,771,520 - (19,700*50*6%)]/2,183,700
Discotinued operations loss		0.22		[(4,72,800 - (19,700*50*6%)]/2,183,700
Net income		0.56		[(1,298,720 - (19,700*50*6%)]/2,183,700