For the year ended December 31, Southern Supply had net sales of $7,880,000, costs and other expenses (including income tax) of $5,900,000, and a gain from discontinued operations (net of income tax) of $420,000.

Required:

a. Prepare a condensed income statement (including earnings per share), assuming that 910,000 shares of common stock were outstanding throughout the year.

b. Which earnings per share figure would you recommend be used to compute the price-earnings ratio for Southern Supply?

a.

Amount ($)

Net Sales 7,880,000

Less : costs and other expenses (including income tax) 5,900,000

= Income before extraordinary items 1,980,000

Add : Extraordinary Gain [gain from discontinued 420,000

operations (net of income tax) ]

= Net Income 2,400,000

Earning Per Shares:

On Income before extraordinary items 2.17

($1,980,000 / 910,000 shares)

On Extraordinary gains ($420,000 / 910,000 shares) 0.46

On Net Income ($2,400,000 / 910,000 shares) 2.63

b. The earnings per share figure I would recommend to be used to compute the price-earnings ratio for Southern Supply would be On Income before extraordinary items

Explanation:

a. The Condensed income statement for the year ended December 31 would be as follows:

Amount ($)

Net Sales 7,880,000

Less : costs and other expenses (including income tax) 5,900,000

= Income before extraordinary items 1,980,000

Add : Extraordinary Gain [gain from discontinued 420,000

operations (net of income tax) ]

= Net Income 2,400,000

Earning Per Shares:

On Income before extraordinary items 2.17

($1,980,000 / 910,000 shares)

On Extraordinary gains ($420,000 / 910,000 shares) 0.46

On Net Income ($2,400,000 / 910,000 shares) 2.63

b. Given the following calculation of Earning per shares:

Earning Per Shares:

On Income before extraordinary items 2.17

($1,980,000 / 910,000 shares)

On Extraordinary gains ($420,000 / 910,000 shares) 0.46

On Net Income ($2,400,000 / 910,000 shares) 2.63

The earnings per share figure I would recommend to be used to compute the price-earnings ratio for Southern Supply would be On Income before extraordinary items because calculations of price earning ratio any items of non - recurring nature are to be excluded, so On Income before extraordinary items I recomend.