Melton Corporation is preparing the comparative financial statements for the annual report to its shareholders for the fiscal years ended May 31, 2011, and May 31, 2012. The income from operations was $1.8 million and $2.5 million, respectively, for each year. In both years, the company incurred a 10% interest expense on $2.4 million of debt for an obligation that requires interest-only payments for five years. The company experienced a loss of $600,000 from the discontinued operation of its Scotland facility in February 2012. The company uses a 40% effective tax rate for income taxes.
The capital structure of Melton Corporation on June 1, 2010, consisted of 1 million common shares outstanding and 20,000 $50, par value, 6% cumulative preferred shares. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants.
On October 1, 2010, Melton sold an additional 500,000 common shares at $20 per share. Melton distributed a 20% stock dividend on the common shares outstanding on January 1, 2011. On December 1, 2011, Melton was able to sell an additional 800,000 common shares at $22 per share. These were the only common share transactions that occurred during the two fiscal years.
(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, 2011.
2. May 31, 2012.
(c) Prepare, in good form, a comparative income statement that begins with income from operations for Melton Corporation for the fiscal years ended May 31, 2011, and May 31, 2012. This statement will be included in Melton’s annual report and should display the appropriate earnings per share presentations.