Question

Presented below is financial information of the Melvina Corporation for 2020.

Gain on the sale of investments 160,000
Net sales 45,000,000
Cost of goods sold 31,000,000
Loss on disposal of wholesale division 670,000
Interest revenue 105,000
Loss on operations of wholesale division 690,000
Selling and administrative expenses 8,200,000
Dividends declared on common stock 340,000
Write off of goodwill 780,000
Dividends declared on preferred stock 120,000
Effective tax rate on all items is 34%

Melvina Corporation decided to discontinue its wholesale operations and to retain their manufacturing operations. On July 1, Melvina sold the wholesale operations. During 2020, there were 850,000 shares of common stock outstanding all year.

Instructions: Compute each of the following . You must show your work..

1. Income from operations

2. Income before income tax

3. Income from continuing operations

4. Net income

5. Earnings per share

Answer 1

1. Income from operations = Net sales - Cost of goods sold- Selling and administrative expenses

=$45,000,000-$31,000,000-$8,200,000

=$5,800,000

2. Income before income tax = Income from operations + Gain on sale of investment+ Interest Revenue- Write off goodwill

=$5,800,000+$160,000+$105,000-$780,000

=$5,285,000

3. Income from continuing operations = Income before income tax- Income tax @34%

=$5,285,000-($5,285,000×34%)

=$5,285,000-$1,796,900

=$3,488,100

4. Net income= Income from continuing operations-( Loss on disposal of wholesale division + Loss on operations of wholesale division) ×(1-tax rate)

=$3,488,100-($670,000+$690,000)(1-34%)

=$3,488,100-$897,600

=$2,590,500

5. Earnings per share =($2,590,500-$120,000)/800,000

=$3.08per share