Your firm, Fusilier, Ide, Star, & Haddock, CPAs (FISH) was recently hired by Orange Tech Incorporated (OTI), one of the largest computer/technology manufacturers/retailers in the world, to perform the audit for OTI. The company had the following information that is pertinent to this case.

• OTI’s offices are located at: 3333 Tech Street, Gulfport, MS 39501.
• OTI has a fiscal year end (FYE) of December 31. (The Fiscal Year is January 1 – December 31, 20xx)
• OTI had 4,450,000 shares of common stock outstanding at the beginning of FYE 20xx.

The following events occurred during this past fiscal year.

• On February 1, 125,000 shares of common stock were issued for cash.
• At the beginning of the fiscal year there were 400,000 shares of convertible preferred stock outstanding. Each preferred stock is convertible into 2 shares of common stock. The preferred stock has a semiannual dividend rate of $.15 paid on April 30 and October 31. On June 1, holders converted 300,000 of the preferred stock shares to common stock (600,000 shares).
• On October 1, 175,000 shares of common stock were issued for cash.
• On November 1, an additional 50,000 shares of common stock were issued for cash.

FYE 20xx	Income (Loss) from Continuing Operations	Net Income (Loss)
Quarter 1 (Jan-Mar)	$11,561,842	$11,561,842
Quarter 2 (Apr-Jun)	$10,044,753	$8,544,753
Quarter 3 (Jul-Sep)	$22,236,159	$22,236,159
Quarter 4 (Oct-Dec)	$11,249,567	$11,249,567
Total for the Year	$55,092,321	$53,592,321
(a) OTI had a $1,500,000 loss on discontinued operations (net of tax) in Quarter 2.

As a Senior Auditor for FISH CPAs you have reviewed the calculations that OTI used to calculate Earnings Per Share (EPS). The calculations are as follows:

Income	Shares	EPS for the period
$11,561,842	4,575,000	$ 2.53
$8,544,753	5,175,000	$ 1.65
$22,236,159	5,175,000	$ 4.30
$11,249,567	5,400,000	$ 2.08
$53,592,321	4,925,000	$ 10.88
(b) (4,450,000 + 5,400,000) / 2 = 4,925,000

Upon your review, you noted that there is only one EPS shown and you are almost certain that these calculations are not correct. You discussed your concern with the Chief Financial Officer (CFO) of OTI, Bailey Lee. Bailey feels that the calculation is correct but has asked you to evaluate the calculations based on the data given above and determine if there are any errors. You have agreed to do this. You also stated that you would provide information on how EPS should be shown on the FYE Income Statement and any necessary Disclosures that OTI is required to make.

Required:

The FISH CPAs office is located at: 980 Beach Boulevard, Biloxi, MS 39530.

Draft a letter (the date of the letter is the actual day you write the letter) addressed to Bailey Lee, OTI CFO, evaluating OTI’s EPS calculations and disclosures and the correct reporting on the FYE financial statements. Include a discussion and specific recommendations of how OTI should calculate and report the information noted above. (You should include specific guidance) Include in your discussion specific and complete references to accounting pronouncements that you used to formulate the basis of your recommendation. You need to go to the FASB Codification site for your research of this case.

Answer rating: 100% (QA)

Dear Mr Lee Thank you for bringing your concern regarding Orange Tech Incorporateds OTI earnings per ... View the full answer