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

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

Eastern Aviation

Income Statement (Amounts in $)

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

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)