Loretta Corporation is preparing the comparative financial statements to be included in the annual report to shareholders. Loretta's fiscal year ends May 31. The following information is available.
1. Income from operations before income tax for Loretta was $1.4 million and $660,000, respectively, for the fiscal years ended May 31, 2015, and 2014.
2. Loretta experienced a loss from discontinued operations of $500,000 from a business segment disposed of on March 3, 2015.
3. A 25% combined income tax rate applies to all of Loretta Corporation's profits, gains, and losses.
4. Loretta's capital structure consists of preferred shares and common shares. The company has not issued any convertible securities or warrants and there are no outstanding stock options.
5. Loretta issued 150,000 of $100 par value, 6% cumulative preferred shares in 2007. All of these shares are outstanding, and no preferred dividends are in arrears.
6. There were 1.5 million common shares outstanding on June 1, 2013. On September 1, 2013, Loretta sold an additional 300,000 common shares at $17 per share. Loretta distributed a 15% stock dividend on the common shares outstanding on December 1, 2014.
7. These were the only common share transactions during the past two fiscal years.
Instructions
(a) Determine the weighted average number of common shares that would be used in calculating earnings per share on the current comparative income statement for:
1. The year ended May 31, 2015
2. The year ended May 31, 2014
(b) Starting with income from operations before income tax, prepare a comparative income statement for the years ended May 31, 2015, and 2014. Assume that Loretta discloses all applicable earnings per share data on the face of the income statement.
(c) A corporation's capital structure is the result of its past financing decisions. Furthermore, the earnings per share data that are presented on a corporation's financial statements depend on the corporation's capital structure.
1. Explain why Loretta Corporation is considered to have a simple capital structure.
2. Describe how earnings per share data would be presented for a corporation that had a complex capital structure.