Question

Blue Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2017, and May 31, 2018. The income from operations for the fiscal year ended May 31, 2017, was $1,791,000 and income from continuing operations for the fiscal year ended May 31, 2018, was $2,378,000. In both years, the company incurred a 10% interest expense on $2,345,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss from discontinued operations of $594,000 on February 2018. The company uses a 40% effective tax rate for income taxes. The capital structure of Blue Corporation on June 1, 2016, consisted of 973,000 shares of common stock outstanding and 19,800 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, 2016, Blue sold an additional 494,000 shares of the common stock at $20 per share. Blue distributed a 20% stock dividend on the common shares outstanding on January 1, 2017. On December 1, 2017, Blue was able to sell an additional 805,000 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 Blue Corporation is a simple or complex capital structure. Determine the weighted-average number of shares that Blue Corporation would use in calculating earnings per share for the fiscal year ended: Weighted-average number of shares (1) May 31, 2017 (2) May 31, 2018 Prepare, in good form, a comparative income statement, beginning with income from operations, for Blue Corporation for the fiscal years ended May 31, 2017, and May 31, 2018. This statement will be included in Blue’s annual report and should display the appropriate earnings per share presentations. (Round earnings per share to 2 decimal places, e.g. $1.55.) BLUE CORPORATION Comparative Income Statement For Fiscal Years Ended May 31, 2017 and 2018 2017 2018 $ $ $ $ Earnings per share: $ $ $ $

Answer 1

Identify whether the capital structure at Blue Corporation is a simple or complex capital structure

Anwer: Blue Corporation has a simple capital structure. Because  the company had not issued any convertible securities, options, or warrants.

Explanation :

Companies with Simple capital structure doesnot have any dilutiuve securitiues (any convertible securities, options, or warrants) in their capital structure. Such companies have issued only common stock, preference stock and non convertable debt securities. In other words, companies with complex capital structure has dilutive securites in their capital structure. Dilutive securities potentially increase the share outstanding of the company.

Determine the weighted-average number of shares that Blue Corporation would use in calculating earnings per share for the fiscal year ended: Weighted-average number of shares (1) May 31, 2017 (2) May 31, 2018

Weighted Average number of shares for May 31, 2017.

We are calculating the weighted average number of shares on time proportionate basis.

Common stock outstanding	31-05-2017	stock outstanding on time proportionate basis
Issued on 01-06-2016	973000	973000* (12 /12 ) = 9,73,000
Issued on 01-10-2016	494000	494000* (8/12) = 3,29,333
Total	1467000	13,02,333

Therefore weighted average number of shares for May 31, 2017 is 13,02,333

Weighted Average number of shares for May 31, 2018.

common stock outstanding	31-05-2018	stock outstanding on time proportionate basis
AS on 01-06-2017	1467000	1467000* (12 /12 ) = 1467000
Issued on 01-12-2017	805000	805000* (6/12) = 402500
Total	22,72,000	18,69,500

Therefore weighted average number of shares for May 31, 2018 is 18,69,500

Note: While calculating EPS, preference shares are excluded from no of shares. Since EPS is a measure of earning per ordinary shares. Refer IAS 33 for details

Comparitive Income Stateent of Blue Corporation

Note:

1. EPS = (Earnings- Preffered Dividend)/ Weighted Average number of shares

There were no preferred dividends in arrears. Hence it is assumed that both the years preferred dividend was duly paid.  preferred dividend is calculated as follows

preferred stock divident = 19,800 shares * $50 par value * 6 %. i.e 59,400

Interest Expense =   $2,345,000 @ 10 % = 234500

2. Compay experienced loss from disontinuing operations the same is not included in the above calculations. Please note that the company doesnot have to disclose the EPS from discontinuing operation on the face of statement of comprehensive income .