ACC 423 Kim Kardashian Corporation

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 

her why.

       

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.