Your client Kim Kardashian Corporation is preparing the
comparative financial statements for the annual report to its shareholders for
fiscal years ended May 31, 2011, and May 31, 2012. She is just a little late
getting married and divorced, busy year. 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
$500,000 from a fire in its Scotland facility in February 2012, which was
determined to be an extraordinary loss. The company uses a 40% effective tax
rate for income taxes.
The capital structure of Kim Kardashian Corporation on
June 1, 2010, consisted of 2 million shares of common stock outstanding and
20,000 shares of $50 par value, 8%, 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, 2010, Kim Kardashian sold an
additional 500,000 shares of the common stock at $20 per share. Kim Kardashian
distributed a 20% stock dividend on the common shares outstanding on January 1,
2011. On December 1, 2011, Kim Kardashian 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.
Ms. Kardashian has come to you with some questions. She
wants you to answer the following questions in writing.
a. Identify whether the capital structure at Kim
Kardashian Corporation is a simple or complex capital structure, and explain to
b. Determine the weighted average number of shares that
Kim Kardashian 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, beginning with income from operations, for Kim Kardashian Corporation
for the fiscal years ended May 31, 2011, and May 31, 2012. This statement will
be included in Kim Kardashian's annual report and should display the appropriate
earnings per share presentations.