Question

Problem 16-6 Skysong 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 $1,775,000 and income from continuing operations for the fiscal year ended May 31, 2018, was $2,566,000. In both years, the company incurred a 10% interest expense on $2,446,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss from discontinued operations of $617,000 on February 2018. The company uses a 40% effective tax rate for income taxes. The capital structure of Skysong Corporation on June 1, 2016, consisted of 954,000 shares of common stock outstanding and 20,100 shares of $50 par value, 5%, 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, Skysong sold an additional 490,000 shares of the common stock at $20 per share. Skysong distributed a 20% stock dividend on the common shares outstanding on January 1, 2017. On December 1, 2017, Skysong was able to sell an additional 794,000 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 Skysong Corporation is a simple or complex capital structure. Determine the weighted-average number of shares that Skysong 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 Skysong Corporation for the fiscal years ended May 31, 2017, and May 31, 2018. This statement will be included in Skysong’s annual report and should display the appropriate earnings per share presentations. (Round earnings per share to 2 decimal places, e.g. $1.55.) SKYSONG CORPORATION Comparative Income Statement For Fiscal Years Ended May 31, 2017 and 2018 2017 2018 $ $ $ $ Earnings per share: $ $ $ $ Question Attempts: 0 of 5 used Save for later Submit Answer

Answer 1

1. The Capital Structure of Skysong Corporation is simple because it is having only one type of common stock outstanding and cumulative Prefrence Stock and not having any other stocks.

2. Comparative Income Statementfor Skysong Corporation

Particulars	May 31, 2017	May 31, 2018
Income
Income from Operation	$ 1,775,000	$ 2,566,000
Total Income (A)	$ 1,775,000	$ 2,566,000
Expenses
Interest Expenses	$ 244,600	$ 244,600
Loss from discontinued operations	-	$ 617,000
Total Expenses (B)	$ 244,600	$ 861,600
Net Profit (A-B)	$ 1,530,400	$ 1,704,400
Less: Proposed Dividend @ 20%	$ 928,000	-
Net Profit after Dividend	$ 602,400	$ 1,704,400
Less: Tax @ 40%	$ 240,960	$ 681,760
Net Profit after Tax	$ 361,440	$ 1,022,640
Less: Preferred Dividend @ 5%	$ 50,250	$ 50,250
Profit available for Equity Shareholders	$ 311,190	$ 972,390
Weighted-average number of shares	627,333	557,000
Earning Per Share	$ 0.50	$ 1.75

Working Note:

Calculation for Weighted-average number of shares for May 2017

(954,000*4) + (464,000*8) / 12

=(3,816,000+3,712,000) / 12

=627,333

Calculation for Weighted-average number of shares for May 2017

(954,000*6) + (160,000*6) / 12

=(5,724,000+960,000) / 12

=557,000

Note: Assume face value of common stock $ 10.