Exercise 1
E.4.12. At Dec 31, 2003, Shiga Naoya Co had the following stock
outstanding :
10 % cumulative preferred stock, $ 100 par, 107,500 shares : $ 10,750,000
Common stock, $ 5 par, 4,000,000 shares
: $ 20,000,000
During 2004, Shiga Naoya’s only stock transaction was the issuance of
400,000 shares of common on April 1. The following also occurred
during 2004 :
• Income from continuing operations before taxes $ 23,650,000
• Discontinued operations (loss before taxes) $ 3,225,000
• Preferred dividends declared $ 1,075,000
• Common dividends declared $ 2,200,000
• Effective tax rate 35 %.
Instructions :
Compute EPS data as its should appear in the 2004 income statement
of Shiga Naoya Co.
Answer of Exercise 1
Net Income
Income from continuing operations before taxes
Income taxes (35 %)
Income from continuing operations
Discontinued operations
Loss before taxes
$ 3,225,000
Less applicable income tax (35 %)
$ 1,128,750
Net income
Preferred dividends declared
Weighted average common shares outstanding
Period Dec 31, 2003 – March 31, 2004 (4,000,000 x 3/12)
Period April 1, 2004 – Dec 31,2004 (4,400,000 x 9/12)
Weighted average
Earnings Per Share
Income from continuing operations
Discontinued operations
Net income
($ 15,372,500,- $ 1,075,000) : 4,300,000 = 3.33
($ 2,096,250 : 4,300,000) = 0.49
($ 13,276,250 - $ 1,075,000) : 4,300,000 = 2.84
$ 23,650,000
$ 8,277,500
$ 15,372,500
$ 2,096,250
$ 13,276,250
$ 1,075,000
1,000,000
3,300,000
4,300,000
$ 3.33
$ (0.49)
$ 2.84
Exercise 2
P.4.1.
Presented below is information related to American Horse Co for 2004 :
• Retained earnings balance, Jan 1,2004
$
980,000
• Sales for the year
$ 25,000,000
• COGS
$ 17,000,000
• Interest revenue
$
70,000
• Selling and administrative expenses
$ 4,700,000
• Write off of goodwill (not tax deductible)
$
820,000
• Income taxes for 2004
$
905,000
• Gain on the sale of investments (normal recurring)
$
110,000
• Loss due to flood damage-extraordinary item (net of tax)
$
390,000
• Loss on the disposition of wholesale division (net of tax)
$
440,000
• Loss on operations of the wholesale division (net of tax)
$
90,000
• Dividends declared on common stock
$
250,000
• Dividend declared on preferred stock
$
70,000
Instructions :
Prepare a multiple step income statement and a retained earnings statement. American
Horse decided to discontinue its entire wholesale operations and retain its
manufacturing operations. On Sept 15, American Horse sold the wholesale operations
to Rogers Co. During 2004 there were 300,000 shares of common stock outstanding
all year.
Answer of Exercise 2
American Horse Co
Income Statement
For the year ended Dec 31,200
Sales
COGS
Gross profit
Selling and administrative expenses
Income from operations
Other revenues and gains
Interest revenue
$ 70,000
Gain on the sale of investments
$ 110,000
Other expenses and losses
Write off goodwill
Income from continuing operations before income taxes
Income taxes
Income from continuing operations
Discontinued operations
Loss on operations, net of tax
$ 90,000
Loss on disposal, net of tax
$ 440,000
Income before extraordinary item
Extraordinary loss from flood damage, net of tax
Net income
$ 25,000,000
$ 17,000,000
$ 8,000,000
$ 4,700,000
$ 3,300,000
$
180,000
$
820,000
$ 2,660,000
$
905,000
$ 1,755,000
$ 530,000
$ 1,225,000
$ 390,000
$ 835,000
Answer of Exercise 2
American Horse Co
Retained Earnings Statement
For the year ended Dec 31,200
Retained earnings, January 1,2004
Net income
Dividends
Preferred stock
Common stock
Retained earnings, December 31,2004
Earnings Per Share
Income from continuing operations
Discontinued operations
Loss on operations (net of tax)
Loss on disposal (net of tax)
Income before extraordinary items
Extraordinary loss (net of tax)
Net income
($ 1,755,000 - $ 70,000) : 300,000 = $ 5.62
($ 1,225,000 - $ 70,000) : 300,000 = $ 3.85
($ 835,000 - $ 70,000) : 300,000 = $ 2.55
$ 980,000
$ 835,000
$ 1,815,000
$ 70,000
$ 250,000 $ 320,000
$ 1,495,000
$
$ (0.30)
$ (1.47)
5.62
$ (1.77)
$ 3.85
$ (1.30)
$ 2.55