EPS and Income statement

P16-6

(Basic EPS: Two-Year Presentation) Melton Corporation is preparing the comparative financial

statements for the annual report to its shareholders for fiscal years ended May 31, 2010, and May 31, 2011.

The income from operations for each year was $1,800,000 and $2,500,000, respectively. In both years, the

company incurred a 10% interest expense on $2,400,000 of debt, an obligation that requires interest-only

payments for 5 years. The company experienced a loss of $600,000 from a fire in its Scotsland facility in

February 2011, which was determined to be an extraordinary loss. The company uses a 40% effective tax

rate for income taxes.

The capital structure of Melton Corporation on June 1, 2009, consisted of 1 million shares of common

stock outstanding and 20,000 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, 2009, Melton sold an additional 500,000 shares of the common stock at $20 per share.

Melton distributed a 20% stock dividend on the common shares outstanding on January 1, 2010. On

December 1, 2010, Melton was able to sell an additional 800,000 shares of the common stock at $22 per

share. These were the only common stock transactions that occurred during the two fiscal years.

Instructions

(a) Identify whether the capital structure at Melton Corporation is a simple or complex capital structure,

and explain why.

(b) Determine the weighted-average number of shares that Melton Corporation would use in calculating

earnings per share for the fiscal year ended

(1) May 31, 2010.

(2) May 31, 2011.

(c) Prepare, in good form, a comparative income statement, beginning with income from operations,

for Melton Corporation for the fiscal years ended May 31, 2010, and May 31, 2011. This statement

will be included in Melton’s annual report and should display the appropriate earnings per share

presentations.

Attached is the corresponding Excel template in a workbook each problem is numbered.

P15-3

(Equity Transactions and Statement Preparation)Hatch Company has two classes of capital

stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2010, the following accounts

were included in stockholders’ equity.

Preferred Stock, 150,000 shares $ 3,000,000

Common Stock, 2,000,000 shares 10,000,000

Paid-in Capital in Excess of Par—Preferred 200,000

Paid-in Capital in Excess of Par—Common 27,000,000

Retained Earnings 4,500,000

The following transactions affected stockholders’ equity during 2011.

Jan. 1 30,000 shares of preferred stock issued at $22 per share.

Feb. 1 50,000 shares of common stock issued at $20 per share.

June 1 2-for-1 stock split (par value reduced to $2.50).

July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method.

Sept. 15 10,000 shares of treasury stock reissued at $11 per share.

Dec. 31 The preferred dividend is declared, and a common dividend of 50¢ per share is declared.

Dec. 31 Net income is $2,100,000.

Instructions

Prepare the stockholders’ equity section for Hatch Company at December 31, 2010. Show all supporting

computations.

The corresponding Excel template is attached in another file with this assignment.