Eastern Aviation operated both an airline and several restaurants located near a

Question

Eastern Aviation operated both an airline and several restaurants located near airports. During the year just ended, all restaurant operations were discontinued and the following operating results were reported.

All of these amounts are before income taxes unless indicated otherwise. The company's income tax rate is 40 percent. The nonrecurring loss resulted from damage to a warehouse that is not related to the discontinued restaurant operations. Eastern Aviation had 1,000,000 shares of capital stock outstanding throughout the year.

Required:

a. Prepare a condensed income statement, including proper presentation of the discontinued restaurant operations and the nonrecurring loss. Include all appropriate earnings per share figures.

b. Assume that you expect the profitability of Eastern Aviation operations to decline by 5 percent next year, and the profitability of the restaurants to decline by 10 percent. What is your estimate of the company’s net earnings per share next year?

Continuing operations (airline): Net sales $ 27,560,000 Costs and expenses 21,660,000 Other data: Operating income from restaurants (net of income tax) 432,000 Gain on sale of restaurants (net of income tax) 2,478,000 Nonrecurring loss 1,200,000

Explanation / Answer

a) Condensed Income Statement of Eastern Aviation is shown as follows:-

Eastern Aviation

Income Statement (Amounts in $)

b) In the next year, the decline in restaurant income is not relevant because restaurant is discontinued.Therefore only income from continuing operations will be there in the next year.

Estimate of Income from continuing operations in next year = Current Year Net Income*(1-0.05)

= $3,540,000*0.95 = $3,363,000

Earnings per share next year = $3,363,000/1,000,000 shares = $3.36 per share

(Non recurring loss in the current year is an abnormal loss and will not be there in the next year)

Particulars Amount Continuing Operations Net Sales 27,560,000 Less: Costs and Expenses (21,660,000) Income from Continuing Operations 5,900,000 Less: Tax@40% ($5,900,000*40%) 2,360,000 Net Income from Continuing Operations (A) 3,540,000 Discontinued Operations Operating Income from restaurants (net of income tax) 432,000 Gain on sale of restaurants (net of income tax) 2,478,000 Income from Discontinued Operations (B) 2,910,000 Net Income (A+B) 6,450,000 No. of shares of common stock (C) 1,000,000 shares Earnings per share of common Stock Earnings from Continuing Operations (A/C) 3.54 per share Earnings from Discontinued Operations (B/C) 2.91 per share Net Earnings per share ($3.54+$2.91) 6.45 per share

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