Comparative Income Statements and Basic EPS Agocha Company reported the following selected items in the stockholders’ equity section of its balance sheet on December 31, 2007 and 2008:
|
December 31, |
||
|
2007 |
2008 |
|
|
7% preferred stock (nonconvertible), $100 par |
$50,000 |
$50,000 |
|
Common stock, $10 par |
70,000 |
84,000 |
In addition, it listed the following selected pretax items in its December 31, 2007 and 2008 adjusted trial balances:
|
31 Dec 07 |
31 Dec 08 |
||
|
Debit |
Credit |
Debit |
Credit |
|
Sales |
$124,300 |
$140,000 |
|
|
Extraordinary gain |
6,000 |
— |
|
|
Cost of goods sold |
$75,000 |
$80,000 |
|
|
Operating expenses |
18,000 |
20,000 |
|
|
Extraordinary loss |
— |
9,000 |
The preferred shares were outstanding during all of 2007 and 2008; annual dividends were declared and paid in each year.
During 2007, 2,000 common shares were sold for cash on October 3. During 2008, a 20% stock dividend was declared and issued in early May. At the end of 2007 and 2008, the common stock was selling for $25.75 and $32.20, respectively. The company is subject to a 30% income tax rate.
Required
1. Prepare the comparative 2007 and 2008 income statements (multiple step), and the related note that would appear in the Agocha Company’s 2008 annual report.
2. Compute the price/earnings ratio for 2008. How does this compare to 2007? Why is it different?