Question

Check my work mode : This shows what is correct or incorrect for the work you have completed so far. It does not indicate For the year ended December 31, Southern Supply had net sales of $7,470,000, costs and other expenses (including income tax) of $5,940,000, and a gain from discontinued operations (net of income tax) of $420,000. 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? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required A Required B Prepare a condensed income statement (including earnings per share), assuming that 910,000 outstanding throughout the year. (Round Earnings per share of common stock to 2 decimal places.) shares of common stock were SOUTHERN SUPPLY Income Statement For the Year Ended er 31, Current Year Net sales Less: Costs and expenses Income before continuing operations Discontinued operations, net of income tax Net income $7,470 5,940,000 1,530,000 420,000 $1,950,000 < Prev 3 of 4 Next >

Answer 1

a.) 140,000 shares of preferred stock have been issued. This is calculated by dividing total amount of preferred stock of $ 14,000,000 by par value of per share of preferred stock, i.e., $ 100.

b.) The rate of dividend to which the preferred stockholders are entitled is generally prefixed in the title of the stock name. In the case, the preferred stock name is '7% preferred cumulative preferred stock', So the preference stockholders are entitled to dividend at the rate of 7% PA. So, for the relevant year, preferred stockholders are entitled to $ 980,000 of dividend for the relevant year by calculating it as 14,000,000*7%.

c.) Issue price of share includes par value of share increased by share premium. Par value of the share is reflected in 'Common stock' account under Capital stock' head. Share premium is reflected by 'Common stock' under 'Additional paid in capital' head. So total proceeds from the issue of common stock will be addition of both the accounts, i.e., 19,000,000 + 44,000,000 = $ 63,000,000. Also, under 'Common stock' account under 'Capital stock' head it is given that 3,800,000 shares have been issued. So, average issue price per share will be 44,000,000/3,800,000 = $ 11.58 (rounding off the answer to two decimal places)

d.) While calculating book value per of common stock, entire additional paid in capital less any dividends to be paid is attributed to common stock. So, books value per share will be [ 'Common stock' under 'Capital stock' head + Entire 'Additional paid in capital' ] divided by (number of shares outstanding). Book value per share in the given share = [19,000,000 + (44,000,000 + 64,450,000)]/3,800,000 = 127,450,000/3,800,000 = $ 33.54 (rounding off the answer to two decimal places)

e.) No, it is not possible to determine the fair market value per share of common stock from the stockholder's equity because calculation of fair market value involves certain other factors in its calculation that are beyond the financial statements as well as the books of the company. Fair market value is the arm length's price on which a share can be traded in the open market which includes certain other factors such as expectations and sentiments of the market about the future performance and standing of the company. While all these factors playing there role, demand and supply of the shares determine the fair market value of the share. Thus fair market value per share of common can not be calculated from the stock holders' equity.