Chapter 8, Problem 40P

To determine

Prepare a schedule showing the calculation of net income and earnings per share that company C’s reports for the three-month period and the six-month period ended June 30, 2015.

Answer to Problem 40P

Net income for three month period is $4,440 and earnings per share are $4.44 and net income for six month period is $9,000 and earnings per share are $9.

Explanation of Solution

A schedule showing the calculation of net income and earnings per share that company C reports for the three-month period

	2015
Particulars	1st Q
Sales	$      18,000
Less: Cost of goods sold	$        7,400
Gross profit	$      10,600
Less: Operating expenses	$        3,200
Income before income taxes	$        7,400
Income taxes (40%)	$        2,960
Net income	$        4,440

Table: (1)

Earnings per share for three month period

$\begin{array}{c}\text{Earnings}\text{per}\text{share for three month period}=\frac{\text{Net}\text{income}-\text{Preferred}\text{dividends}}{\text{Average}\text{common}\text{shares}\text{outstanding}}\\ =\frac{\$4,440-\$0}{1,000}\\ =\frac{\$4,440}{1,000}\\ =\$4.44\end{array}$

Thus, Earnings per share for three month period is $4.44

A schedule showing the calculation of net income and earnings per share that company C reports for the six-month period ended June 30, 2015

	2015
Particulars	$1stQ+2ndQ$
Sales	$         38,000
Less: Cost of goods sold	$         16,400
Gross profit	$         21,600
Less: Operating expenses	$           6,600
Income before income taxes	$         15,000
Income taxes (40%)	$           6,000
Net income	$           9,000

Table: (2)

Earnings per share for six month period

$\begin{array}{c}\text{Earnings}\text{per}\text{share}\text{for}\text{six}\text{month}\text{period}=\frac{\text{Net}\text{income}-\text{Preferred}\text{dividends}}{\text{Average}\text{common}\text{shares}\text{outstanding}}\\ =\frac{\$9,000-\$0}{1,000}\\ =\frac{\$9,000}{1,000}\\ =\$9\end{array}$

Thus, earnings per share for six month period is $9

Working note

Schedule showing calculation of net income that company C reports for the two quarters:

	2015
Particulars	1st Q	2nd Q	Consolidated balance
Sales	$      18,000	$           20,000	$                      38,000
Less: Cost of goods sold	$        7,400	$             9,000	$                      16,400
Gross profit	$      10,600	$           11,000	$                      21,600
Less: Operating expenses	$        3,200	$             3,400	$                        6,600
Income before income taxes	$        7,400	$             7,600	$                      15,000
Income taxes (40%)	$        2,960	$             3,040	$                        6,000
Net income	$        4,440	$             4,560	$                        9,000

Table: (3)