Pacific Airlines operated both an airline and several rental car operations located near airports.During the year just ended, all rental car operations were discontinued and the following operatingresults were reported:Problem Set B PROBLEM 12.1BReporting UnusualEvents: UsingPredictive SubtotalsPRLO1EP LO2 Continuing operations (airline):Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,440,000Costs and expenses (including income taxes on continuing operations) . . . . 53,980,000Other data:Operating income from car rentals (net of income tax) . . . . . . . . . . . . . . . . . . 670,000Gain on sale of rental car business (net of income tax) . . . . . . . . . . . . . . . . . 4,330,000Extraordinary loss (net of income tax benefit) . . . . . . . . . . . . . . . . . . . . . . . . 3,120,000 Continuing operations:Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,400,000Costs and expenses (including applicable income taxes) . . . . . . . . . . . . . . . 21,500,000Other data:Operating income during 2011 on segment of the businessdiscontinued near year-end (net of income taxes) . . . . . . . . . . . . . . . . . . . 205,000Loss on disposal of discontinued segment (net of incometax benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,000Extraordinary loss (net of income tax benefit) . . . . . . . . . . . . . . . . . . . . . . . . 930,000Prior period adjustment (increase in 2010 amortizationexpense, net of income tax benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000The extraordinary loss resulted from the destruction of an airliner by terrorists. Pacific Airlines had4,000,000 shares of capital stock outstanding throughout the year.Instructionsa. Prepare a condensed income statement, including proper presentation of the discontinuedrental car operations and the extraordinary loss. Include all appropriate earnings per sharefigures.b. Assume that you expect the profitability of Pacific’s airline operations to decline by 10 percentnext year and the profitability of the rental car operation to decline by 10 percent. What is yourestimate of the company’s net earnings per share next year?
Pacific Airlines operated both an airline and several rental car operations located near airports.
During the year just ended, all rental car operations were discontinued and the following operating
results were reported:
Problem Set B
PROBLEM 12.1B
Reporting Unusual
Events: Using
Predictive Subtotals
P
R
LO1
E
P LO2
Continuing operations (airline):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,440,000
Costs and expenses (including income taxes on continuing operations) . . . . 53,980,000
Other data:
Operating income from car rentals (net of income tax) . . . . . . . . . . . . . . . . . . 670,000
Gain on sale of rental car business (net of income tax) . . . . . . . . . . . . . . . . . 4,330,000
Extraordinary loss (net of income tax benefit) . . . . . . . . . . . . . . . . . . . . . . . . 3,120,000
Continuing operations:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,400,000
Costs and expenses (including applicable income taxes) . . . . . . . . . . . . . . . 21,500,000
Other data:
Operating income during 2011 on segment of the business
discontinued near year-end (net of income taxes) . . . . . . . . . . . . . . . . . . . 205,000
Loss on disposal of discontinued segment (net of income
tax benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,000
Extraordinary loss (net of income tax benefit) . . . . . . . . . . . . . . . . . . . . . . . . 930,000
Prior period adjustment (increase in 2010 amortization
expense, net of income tax benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
The extraordinary loss resulted from the destruction of an airliner by terrorists. Pacific Airlines had
4,000,000 shares of capital stock outstanding throughout the year.
Instructions
a. Prepare a condensed income statement, including proper presentation of the discontinued
rental car operations and the extraordinary loss. Include all appropriate earnings per share
figures.
b. Assume that you expect the profitability of Pacific’s airline operations to decline by 10 percent
next year and the profitability of the rental car operation to decline by 10 percent. What is your
estimate of the company’s net earnings per share next year?
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