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.

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

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?

Answer 1

Part a	EASTERN AVIATION
	CONDENSED INCOME STATEMENT
	FOR THE YEAR ENDED DECEMBER 31, 20XX
	Net sales	27,560,000
	Costs and expenses (excluding tax on continuing operations)	21,660,000
	Income before tax	5,900,000
	Less: Tax at 40%	2,360,000
	Income from continuing operations	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 before extraordinary items	6,450,000
	Extraordinary loss (net of income tax benefit)
	(1200000 - 40% x 1200000)	(720,000)
	Net income	5,730,000
	Earnings per share of common stock:
	Earnings from continuing operations	3.54	a
	Earnings from discontinued operations	2.91	b
	Earnings before extraordinary items	6.45	a+b
	Extraordinary loss	-0.72	c
	Net earnings	5.73	a+b+c
a	3540000 ÷ 1000000
b	(432000+2478000) ÷ 1000000
c	-720000 ÷ 1000000
part b	Profitability current year	$        3,540,000
	Less: 5% of current profitability	$            177,000
	Next year Income	$        3,363,000
	÷ NO of shares O/s	1,000,000
	EPS	$                   3.36
Point to note: Since restaurant business is discontinued in current year, there will be no income
	from restaurant buisness next year and non recurring loss also will have no effect