XXX Corporation is preparing the comparative financial statements to be included

Question

XXX Corporation is preparing the comparative financial statements to be included in the annual report to stockholders. XXX employs a fiscal year ending Oct 31.

Income from operations before income taxes for XXX was $3,750,000 and $3,200,000, respectively, for fiscal years ended Oct 31, 2015 and 2014. XXX experienced an extraordinary loss of $600,000 because of an earthquake on June 6, 2015. A 40% combined income tax rate pertains to any and all of XXX Corporation’s profits, gains, and losses.

XXX’s capital structure consists of preferred stock and common stock. The company has not issued any convertible securities or warrants and there are no outstanding stock options.

XXX issued 100,000 shares of $100 par value, 4% cumulative preferred stock in 2009. All of this stock is outstanding, and no preferred dividends are in arrears.

There were 2,000,000 shares of $1 par common stock outstanding on Nov. 1, 2013. On Feb. 1, 2014, XXX sold an additional 600,000 shares of the common stock at $24 per share. XXX distributed a 15% stock dividend on the common shares outstanding on Apr 1, 2015. On Oct. 1 2015 there was a 2 for 1 split. These were the only common stock transactions during the past 2 fiscal years.

Determine the weighted-average number of common shares that would be used in computing earnings per share on the current comparative income statement for:

Weighted-average number of common shares

(A)

(1)                   The year ended Oct 31, 2014.             

(2)                  The year ended Oct 31, 2015.

(B)       Starting with income from operations before income taxes, prepare a comparative income statement for the years ended Oct. 31, 2015 and 2014. Show related EPS amounts.

Explanation / Answer

Answer:

(A)

For the year ended on 31.10.2014; Weighted Average Number of Common Shares Outstanding;

= 2,000,000 shares of $ 1 each outstanding since Nov. 1, 2013 for 12 months + 600,000 common shares of $ 24 per share issued on Feb 1, 2014 outstanding for 9 months = 2,000,000 + 600,000 x 9/12 = 2,450,000 weighted average number of common shares for computing earnings per share.

For the year ended on 31.10.2015; Weighted Average Number of Common Shares Outstanding;

2 for 1 split of shares on Oct.1, 2015 will result in 2,600,000 x 2 common shares as on 31.10.2015 = 5,200,000 weighted average common shares as on 31.10.2015. Alternately, it can be considered on prorata basis that is 2,600,000 common shares for 11 months upto 30.09.2015 and 5,200,000 common shares for 1 month from 1.10.2015 to 31.10.2015.

(B) Comparative Income Statement for the two years

Particulars 2014 2015 Income from Operations before income taxes $ 3,200,000 $ 3,750,000 Less:Extraordinary Loss NIL $ 600,000 Less: Income Tax @ 40% $ 1,280,000 $ 1,260,000 Income after Tax $ 1,920,000 $ 1,890,000 Less: Preferance Dividend $ 400,000 $ 400,000 Less: Common Stock Dividend (15% of 2,600,000) NIL $ 390,000 Earnings for Common Shareholders / Retained Earnings $ 1,520,000 $ 1,100,000

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