This simulation asks you to complete tasks related to measurement and disclosure involving the

income statement. The simulation provides all the information necessary to do your work.

Situation: Your task is to prepare the income statement for Kendall Inc. The information provided is
in no special order, and some items may not be relevant to income statement reporting. All items are
pretax, where relevant. Kendall faces an average tax rate of 30% which applies to all items subject to
tax. Kendall's inventory costs have increased gradually over the last several years. Kendall has 10,000
shares of common stock outstanding.

Using the information from the list provided, prepare the segment's income statement for the current
year in the spreadsheet below. Kendall reports all required earnings per share disclosures directly
below net income on the income statement. The segment had no dilutive securities outstanding during
the period. Kendall reports gross margin and operating income, a subtotal before interest and
dividends. Revenue unrelated to gross margin is reported below gross margin. Enter the amount for
net sales and cost of goods sold as a single value rather than showing its components.

For each of the Items for Column A below, indicate the concept being defined by double clicking the
related cell and selecting the appropriate concept from the list provided. Each concept will be used
only once. Amounts not provided in column B will need to be computed by the student and the result
entered into appropriate cell. Use parentheses for negative amounts leading to subtotals as
appropriate. Please note that the last three entries in the spreadsheet require two decimals each.

Gross sales, $750,000

Sales returns and allowances, ($20,000)
Sales discounts, ($5,000)
Net Sales
Cost of Goods Sold:
Beginning inventory, $36,000
Transportation in, $32,000
Gross purchases, $212,000
Purchases returns and allowances, ($24,000)
Ending inventory, ($45,000)
Cost of Goods Sold
Gross Margin
Bad debt expense, $12,000
Depreciation and amortization, $67,000
Rent expense, $14,000
Salaries and wage expense, $156,000
Transportation out, $19,000
Operating Income:
Interest expense, ($9,000)
Dividends received on investments in trading securities, $23,000
Income From Continuing Operations before tax 260,000
Income Tax Expense
Income From Continuing Operations
Discontinued Operations:
Operating loss from discontinued operation 35,000
Net Income
Earnings Per Share:
Income From Continuing Operations
Discontinued operations
Net Income

Rationale:

Only three items were not used on the Income Statement.

1.Allowance for doubtful accounts balance, $6,400 - This is a contra asset and is found on
the Balance Sheet.

2. Cumulative effect of change from LIFO to FIFO, $50,000 - The change from LIFO to FIFO
is an accounting principle change which therefore does not affect current period income. It
is reported as a direct adjustment to the beginning retained earnings balance.

3. Unrealized loss on securities available for sale, ($20,000) - This is a part of Other
Comprehensive Income.

4. Weighted average common shares outstanding, 10,000 - This is used to calculate EPS,
but is not a line item within the income statement.

Gain on disposal of plant assetIncome from continuous operations (IFCO)Unearned revenueNone of

the aboveCumulative effect of change from LIFO to FIFOOwner's equity other than the above three
measuresUnrealized loss on investment in trading securitiesIncome from continuous operations
(IFCO)Realized gain on investment in securities available for saleIncome from continuous operations
(IFCO)Unrealized loss on investment in securities available for saleOther comprehensive
incomeCumulative effect of change from FIFO to LIFOOwner's equity other than the above three
measuresEffect of change in estimate of useful life for a plant assetIncome from continuous operations
(IFCO)Estimated disposal loss on discontinued component for which operations and cash flows can be
distinguished from the rest of the entity for operational and financial reporting purposesIncome other
than IFCODeferred tax liabilityNone of the aboveIncrease in unrealized pension costOther
comprehensive incomeIncome tax expenseIncome from continuous operations (IFCO)Restructuring
chargeIncome from continuous operations (IFCO)Loss from effect of a new regulation or lawIncome
from continuous operations (IFCO)Stock dividend distributedOwner's equity other than the above
three measuresAccumulated other comprehensive incomeOwner's equity other than the above three
measuresDividends received on investment in securities available for saleIncome from continuous
operations (IFCO)Dividends received on equity method investmentNone of the above
You will record five journal entries related to income measurement in this TBS. Each of the five is
independent. Enter the appropriate account title in column A by double clicking on the related cell in
column A and selecting the desired account title from the list provided. You need not indent the title of
the account to be credited. Use columns B and C to enter the debit and credit dollar amounts
corresponding to each account you used in a journal entry. Complete the journal entries in the order
given below. Do not leave a blank row between journal entries. Enter 0 where no other entry is
appropriate. Each amount and account may be used one, more than once, or not at all.

1. Products are sold with the following warranty: the product may be returned for service free of cost
to the customer any time during the year of sale and for the succeeding three calendar years. Thus if
a product is sold in 20x3, the warranty covers the product through the end of 20x6. The cost to
service warranty claims is estimated to be 1% of sales in the year of sale, 2% in the year following
sale, 3% in the second year after sale, and 4% in the third year after sale. During 20x3, sales under
warranty totaled $600,000. Assume that warranty expense is recorded as an adjusting entry at year-
end. Record that entry for 20x3.

2. The count of inventory at year-end for a firm using the periodic inventory system revealed that
inventory had increased $40,000 compared with the beginning inventory. Gross purchases for the
year totaled $670,000; purchases discounts taken were $12,000; purchases returns and allowances
were $82,000; transportation in amounted to $33,000; and transportation out was $9,000. Provide
the adjusting entry that establishes cost of goods sold for the period, updates the inventory account,
and closes the other accounts related to inventory (only).

3. The CEO's compensation contract includes a provision for a bonus of 15% of income before the
bonus but after income taxes (30% rate). Income before bonus and income tax is $1.2 million for the
current year. The bonus is computed and paid at year-end to obtain the tax deduction for the bonus in
the current year. Prepare the journal entry to record the bonus only.

4. Inventory with a recorded cost of $550,000 was completely destroyed in an uninsured casualty. The
relevant tax rate is 35%. Record journal entry for the loss.

A1 lock copy cut paste

A B C
1 Account Title Debit Amount Credit Amount
2 Warranty expense 60000 0
3 Warranty liability 0 60000
4 Inventory 40000 0
5 Purchases discounts 12000 0
6 Purchases returns and allowances 82000 0
7 Cost of goods sold 569000 0
8 Purchases 0 670000
9 Transportation in 0 33000
10 Salary expense 131937 0
11 Cash 0 131937
12 Inventory loss 550000 0
13 Inventory 0 550000
Rationale:

1. $600,000(1% + 2% + 3% + 4%) = $60,000. The entire amount of warranty expense

and liability is recognized in the year of sale. When the claims are serviced, the warranty
liability is reduced; no additional expense is recognized.

The entry would be:

Warranty expense 60,000

Warranty Liability 60,000

2. Transportation out is not a product cost it is a selling cost and; it will be closed along
with other expenses and revenues. The other inventory related accounts (purchases,
purchase discounts, purchase R&A, and transportation in) are closed to calculate CGS. Even
though we do not know the value of beginning inventory - we know that ending inventory is
40,000 higher than beginning inventory. You can assume a beginning inventory value of
zero and proceed with the calculation.

Beginning Inventory 0
Purchases 670,000
Less:
Purchase discounts (12,000)
Purchase R&A (82,000) (94,000)
Net Purchases 576,000
Plus transportation in 33,000
Less Ending Inventory (40,000)
Cost of Goods Sold 569,000

3. Let B = bonus and T = income tax

B = .15(1.2 million - T)
T = .30(1.2 million - B)
B = .15(1.2 million - [.30(1.2 million - B)])
B = .15(1.2 million - [.30(1.2 million) - .30B])
B = .15(1.2 million - .36 million + .30B)
B = .15(.84 million + .30B)
B = .126 million + .045B
.955B = .126 million
B = .126 million/.955 = 131,937

Since the bonus is paid before year end, the entry would be:

Salary expense 131,937

Cash 131,937

4. The loss on the destruction of inventory is reported as a component of income from

continuing operations. Inventory is reduced for the amount of the loss ($550,000). If the
loss is material, the amount of the loss should be disclosed in the financial statements or
footnotes.