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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

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Exercise 1


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exercise 1
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
Answer of Exercise 1

Net Income

Income from continuing operations before taxes $ 23,650,000

Income taxes (35 %) $ 8,277,500

Income from continuing operations $ 15,372,500

Discontinued operations

Loss before taxes $ 3,225,000

Less applicable income tax (35 %) $ 1,128,750$ 2,096,250

Net income $ 13,276,250

Preferred dividends declared $ 1,075,000

Weighted average common shares outstanding

Period Dec 31, 2003 – March 31, 2004 (4,000,000 x 3/12) 1,000,000

Period April 1, 2004 – Dec 31,2004 (4,400,000 x 9/12) 3,300,000

Weighted average 4,300,000

Earnings Per Share

Income from continuing operations $ 3.33

Discontinued operations $ (0.49)

Net income $ 2.84

($ 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

exercise 2
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
Answer of Exercise 2

American Horse Co

Income Statement

For the year ended Dec 31,200

Sales $ 25,000,000

COGS $ 17,000,000

Gross profit $ 8,000,000

Selling and administrative expenses $ 4,700,000

Income from operations $ 3,300,000

Other revenues and gains

Interest revenue $ 70,000

Gain on the sale of investments $ 110,000 $ 180,000

Other expenses and losses

Write off goodwill $ 820,000

Income from continuing operations before income taxes $ 2,660,000

Income taxes $ 905,000

Income from continuing operations $ 1,755,000

Discontinued operations

Loss on operations, net of tax $ 90,000

Loss on disposal, net of tax $ 440,000$ 530,000

Income before extraordinary item $ 1,225,000

Extraordinary loss from flood damage, net of tax $ 390,000

Net income $ 835,000

answer of exercise 21
Answer of Exercise 2

American Horse Co

Retained Earnings Statement

For the year ended Dec 31,200

Retained earnings, January 1,2004 $ 980,000

Net income $ 835,000

$ 1,815,000

Dividends

Preferred stock $ 70,000

Common stock $ 250,000$ 320,000

Retained earnings, December 31,2004 $ 1,495,000

Earnings Per Share

Income from continuing operations $ 5.62

Discontinued operations

Loss on operations (net of tax) $ (0.30)

Loss on disposal (net of tax) $ (1.47)$ (1.77)

Income before extraordinary items $ 3.85

Extraordinary loss (net of tax) $ (1.30)

Net income $ 2.55

($ 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