P16-9 (EPS with Stock Dividend and Extraordinary Items) Agassi Corporation is pr
ID: 2388463 • Letter: P
Question
P16-9 (EPS with Stock Dividend and Extraordinary Items) Agassi Corporation is preparing the comparativefinancial statements to be included in the annual report to stockholders. Agassi employs a fiscal
year ending May 31.
h1eome from operations before income taxes for Agassi was $1,400,000 and $660,000, respectively, for
fiscal years ended May 31, 2013 and 2012. Agassi experienced an extraordinary loss of $400,000 because of
an earthquake on March 3, 2013. A 40% combined income tax rate pertains to any and all of Agassi Corporation's
profits, gains, and losses.
Agassi' s capital structure consists of preferred stock and common stock. The company has not issued
any convertible securities or warrants and there are no outstanding stock options.
Agassi issued 40,000 shares of $100 par value, 6% cumulative preferred stock in 2009. All of this stock
is outstanding, and no preferred dividends are in arrears.
There were 1,000,000 shares of $1 par common stock outstanding on Jtme 1, 2011. On September 1,
2011, Agassi sold an additional 400,000 shares of the common stock at $17 per share. Agassi distributed a
20"/o stock dividend on the common shares outstanding on December 1, 2012. These were the only common
stock transactions during the past 2 fiscal years.
Instructions
(a) Determine the weighted-average number of common shares that would be used in computing earnings
per share on the current comparative income statement for:
(1) The year ended May 31,2012.
(2) The year ended May 31,2013.
(b) Starting with income from operations before income taxes, prepare a comparative income
statement for the years ended May 31, 2013 and 2012. The statement will be part of Agassi
Corporation's annual report to stockholders and should include appropriate earnings per share
presentation.
(c) The capital structure of a corporation is the result of its past financing decisions. Furthermore, the
earnings per share data presented on a corporation's financial statements is dependent upon the
capital stntcture.
(1) Explain why Agassi Corporation is considered to have a simple capital structure.
(2) Describe how earnings per share data would be presented for a corporation that has a complex
Explanation / Answer
Weighted Average Shares
Before Stock Dividend After Stock Dividend
Total as of June 1, 2009 1,000,000 1,200,000
Issue of September 1, 2009 400,000 480,000
Total as of May 31, 2011 1,400,000 1,680,000
(1) The year ended May 31, 2010.
1,200,000 * (3
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