Question

Kelsy Company (Homework) Following are financial data for Kelsy Company for the year ended December 31, 2020. Revenues and expenses: Continuing operations: Net sales revenue $1,950,000 Cost of goods sold. 510,000 Selling & administrative expenses 200,000 Interest income 10,000 Interest expense 50,000 Discontinued operations-Division X (Note A): Net sales revenue. 800,000 Cost of goods sold 700,000 Selling & administrative expenses 500,000 Other: Discontinued division phase-out loss (Note A). 250,000 Litigation loss (Note B). 100,000 Dividends declared (Note C). 220,000 Note A. Division X was phased out in September. Phase-out losses, including severance pay, amounted to $250,000 Note B. In 2020 the company paid $100,000 to a former employee in an out-of-court settlement of litigation stemming from an alleged employment rights violation. The alleged incident occurred in 2017 and no losses were accrued heretofore with respect to this case. Note C. On December 20 the Company declared cash dividends of $220,000 payable on January 20, 2021. Income taxes. All amounts stated above are before considering the effects of income taxes. The income tax rate (state + federal) is 25%. Required: Prepare Kelskis income statement for 2020. Omit EPS data. (Complete next page.) Check Figures: Operating income - 1,240,000 Income from continuing operations - 825,000 Loss from operations, net of tax benefit = 300,000 Net income - 337,500

Answer 1

Kelsy Company Income Statement For the year ended December 31, 2020 Net sales revenue $1,950,000 Cost of goods sold $510,000 Gross Profit $1,440,000 (Net sales revenue - cost of goods sold) Selling & administrative expenses $200,000 Income from operations $1,240,000 (Gross Profit - selling & administrative expenses) Other revenues, expenses and losses: Interest income $10,000 1 Interest expense $50,000 Litigation loss $100,000 Income from continuing operations before income tax $1,100,000 ($1,240,000+ $10,000 - $50,000 - $100,000) 1 Income tax $275,000 ($1,100,000*25%) 5 Income from continuing operations $825,000 ($1,100,000 - $275,000) 5 Discontinued operations: Loss from operations of discontinued division, less Applicable income tax benefit of $100,000 $300,000 Phase-out losses of discontinued division, less Applicable income tax benefit of $62,500 $187,500 3 Net income $337,500 ($825,000 - $300,000 - $187,500) Working Notes 1 Loss from operations of discontinued division 2 Net Sales revenue $800,000 3 Less: Cost of Goods Sold $700,000 1 Gross Profit $100,000 Less: Selling & administrative expenses $500,000 Loss from operations of discontinued division $400,000 Less: Tax benefit @ 25% $100,000 B Loss from operations of discontinued division less income tax benefit $300,000 2 2 Phase-out losses of discontinued division 1 Phase-out losses of discontinued division $250,000 2 Less: Tax benefit @ 25% $62,500 B Phase-out losses of discontinued division, less income tax benefit $187,500