Agocha Company reported the following selected items in the stockholders' equity section of its balance sheet on December 31, 2007 and 2008:

In addition, it listed the following selected pretax items in its December 31, 2007 and 2008 adjusted trial balances:

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 itdifferent?

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December 31 2007 7% preferred stock (nonconvertible), $100 par Common stock, $10 par 2008 $50,000 84,000 $50,000 70,000 December 31, 2007 Debit December 31, 2008 Debit $140,000 Sales Extraordinary gain Cost of goods sold Operating expenses Extraordinary loss $124,300 6,000 $75,000 18,000 $80,000 20,000 9,000