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Basic EPS: Two-Year Presentation

This problem is dealing with determine wheater the corporation is a simple or complex structure and why, determining the weighter average number of shares, EPS, and prepaing a comparative income statement.

P16-5 (Basic EPS: Two-Year Presentation) Hillel Corporation is preparing the comparative financial
statements for the annual report to its shareholders for fiscal years ended May 31, 2006, and May 31, 2007.
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 Scotsland facility in
February 2007, which was determined to be an extraordinary loss. The company uses a 40% effective tax
rate for income taxes.
The capital structure of Hillel Corporation on June 1, 2005, 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, 2005, Hillel sold an additional 500,000 shares of the common stock at $20 per share.
Hillel distributed a 20% stock dividend on the common shares outstanding on January 1, 2006. On
December 1, 2006, Hillel 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.

Instructions
(a) Identify whether the capital structure at Hillel Corporation is a simple or complex capital structure,
and explain why.

(b) Determine the weighted-average number of shares that Hillel Corporation would use in calculating
earnings per share for the fiscal year ended
(1) May 31, 2006.
(2) May 31, 2007.

(c) Prepare, in good form, a comparative income statement, beginning with income from operations,
for Hillel Corporation for the fiscal years ended May 31, 2006, and May 31, 2007. This statement
will be included in Hillel's annual report and should display the appropriate earnings per share
presentations.

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Solution Preview

(a) Identify whether the capital structure at Hillel Corporation is a simple or complex capital structure,
and explain why.

Hillel Corporation has a simple capital structure since it does not have any potentially dilutive securities.

(b) Determine the weighted-average number of shares that Hillel Corporation would use in calculating
earnings per share for the fiscal year ended
(1) May 31, 2006.
(2) May 31, 2007.

The weighted average number of shares that Hillel Corporation would use in calculating earnings per share for the fiscal years ended
May 31, 2006, and May 31, 2007, is 2,800,000 and 3,400,000 respectively, calculated as ...

Solution Summary

The solution explains the calculation of basic EPS and the preparation of a comparative income statement

$2.19