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CHAPTER 13

REPORTING FOR COMPONENTS;


INTERIM REPORTS; REPORTING FOR THE SEC

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 13–1 Wabash Company (20 minutes, easy)


Computation of segment profit or loss for four operating segments.
Pr. 13–2 Cregar Company (40 minutes, medium)
Preparation of corrected income statements for three years to display discontinued operations.
Pr. 13–3 Lang Corporation (45 minutes, medium)
Computation of effective combined federal and state income tax rates for interim reports.
Journal entries for income taxes expense in interim periods.
Pr. 13–4 Bixler Company (50 minutes, medium)
Comparative income statements for enterprise with discontinued operations and unusual (but
not extraordinary) items.
Pr. 13–5 Draco Company (45 minutes, medium)
Income statement for enterprise with discontinued operations and extraordinary item.
Pr. 13–6 Principia Corporation (60 minutes, strong)
Preparation of summary of information about income statement and balance sheet items of
four operating segments.
Pr. 13–7 Lobeck Company et al. (60 minutes, strong)
Partial income statement displaying disposal of an operating segment; journal entries for four
quarters’ income taxes expense; journal entries for temporary depletion of lifo inventory layer
during an interim period.

ANSWERS TO REVIEW QUESTIONS


1. An operating segment is a component of an enterprise:
(1) That engages in business activities for which it may earn revenues and incur expenses
(2) Whose operations are regularly reviewed by the enterprise’s chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance, and
(3) For which discrete financial information is available.
2. No, the concept of segment reporting is not consistent with the theory of consolidated financial
statements. Under that theory, a single set of financial statements is considered to present fairly the
financial position, operating results, and cash flows of a single economic entity, regardless of the
legal or operating segment structure of the entity. Segment reporting, in contrast, encompasses
separate financial disclosures for each reportable operating segment of a single economic entity.

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Solutions Manual, Chapter 13 133
3. The format established by the FASB for reporting the disposal of an operating segment of an entity
is adding a gain or deducting a loss on disposal to or from income from continuing operations. The
gain or loss on disposal includes both income or loss from operations of the segment prior to its
disposal and the gain or loss from disposal of the segment’s net assets. Applicable income taxes are
applied to the gain or loss.
4. APB Opinion No. 28, “Interim Financial Reporting,” requires use of the same accounting
principles in interim financial statements as in fiscal year financial statements for costs and
expenses associated directly with or allocated to products sold or services rendered. The Opinion
provides four exceptions to the general rule for enterprises using the gross margin method, last-in,
first-out inventory costing method, lower-of-cost-or-market inventory valuation method, or
standard cost method of computing cost of goods sold for interim financial reports.
5. If an inventory replacement cost decline on an interim date is considered to be temporary, it is
disregarded in the preparation of interim financial reports. If a replacement cost decline on an
interim date is expected to be applicable at the end of the fiscal year, it is recognized in cost of
goods sold for the interim period. If an inventory replacement cost write-down in one interim period
is offset by an inventory replacement cost increase in a subsequent interim period, a gain is
recognized in the subsequent period to the extent of the loss recognized in preceding interim periods
of the fiscal year.
6. APB Opinion No. 28, “Interim Financial Reporting,” provides that at the end of each interim
period a business enterprise should make its best estimate of the effective income tax rate expected
to be applicable for the full fiscal year. The estimated rate is used to account for income taxes
expense on a current year-to-date basis. The effective income tax rate should reflect anticipated
foreign tax rates, percentage depletion, and other available income tax planning alternatives.
7. Six U.S. statutes administered by the SEC are as follows (only four are required):
(1) Securities Act of 1933
(2) Securities Exchange Act of 1934
(3) Public Utility Holding Company Act of 1935
(4) Trust Indenture Act of 1939
(5) Investment Company Act of 1940
(6) Investment Advisers Act of 1940
8. Form 10-K is an annual report currently filed with the SEC within 60 days after the close of each
fiscal year by companies subject to the periodic reporting requirements of the Securities Exchange
Act of 1934. Form 8-K is a current report filed with the SEC within four business days after the
occurrence of certain specified events or events elected to be disclosed by the companies.
9. If stockholders of a business enterprise are to vote on authorization of issuances of securities,
modification or exchanges of securities, or business combinations, the enterprise’s proxy
statement must include financial statements of the enterprise, as required by the Securities
Exchange Act of 1934.
10. In Codification of Financial Reporting Policies, the SEC expressed an intention to concentrate
on pronouncements on disclosures in financial statements and schedules, while acknowledging that
pronouncements of the FASB provide substantial authoritative support for the accounting
principles established by the FASB.
11. Regulation S-X provides accountants guidance for the form and content of financial statements
and schedules required to be filed with the SEC.
12. Regulation S-K of the SEC provides guidance for the non-financial statement disclosure
requirements in the various Forms filed with the SEC.
13. Financial Reporting Releases are pronouncements issued by the SEC that state its views on
financial accounting matters.
14. The SEC permits, but does not require, disclosure of financial forecasts in filings with the SEC.
However, the SEC has undertaken a program to encourage voluntary filings of financial forecasts
in reports to the SEC.

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134 Modern Advanced Accounting, 10/e
SOLUTIONS TO EXERCISES
Ex. 13–1 1. b
2. c [$60,000 – ($150,000 x 0.20) = $30,000]
3. b [$125,000 – ($180,000 x 0.25) = $80,000]
4. a
5. a
6. d [($50,000 + $15,000 + $150,000 + $1,750,000) – $1,000,000 = $965,000]
7. c
8. d [$700,000 + ($60,000 x 0.60) + ($150,000 x 0.60) = $826,000]
9. a
10. d
11. a
12. a
13. b
14. d
15. a
16. b [($170,000 x 0.45) – ($130,000 x 0.40) = $24,500]
17. a
18. b
19. e
20. c
21. a
Ex. 13–2 Computation of revenue and segment profit of operating segments of Polyglot Company for
year ended June 30, 2006 (amounts in thousands):
Operating Segment
Alpha Beta Gamma
Revenue:
Sales to unaffiliated customers $400 $500 $600
Intersegment sales 50 40 30
Total revenue $450 $540 $630
Expenses:
Traceable:
Intersegment purchases $ 60 $ 20 $ 40
Other 200 300 500
Nontraceable (allocated in ratio of 4:5:6) 40 50 60
Total expenses $300 $370 $600
Segment profit $150 $170 $ 30
Ex. 13–3 Computation of segment profit for Rinker Company’s Segment No. 1 for 2006:
Segment sales $900,000
Less: Segment traceable expenses 400,000
Subtotal $500,000
Less: Allocated nontraceable expenses ($600,000 x 0.60) 360,000
Segment profit $140,000

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Solutions Manual, Chapter 13 135
Ex. 13–4 Computation of allocation of nontraceable expenses of Coopers Company for year ended June
30, 2006:
Sporting
Chemicals goods
segment segment
Net sales percentages
($1,400,000/$2,000,000 and $600,000/$2,000,000) 70% 30%
Payroll percentages
($150,000/$250,000 and $100,000/$250,000) 60 40
Average plant assets and inventories percentages
($710,000/$1,000,000 and $290,000/$1,000,000) 71 29
Totals 201% 99%
Average percentages (÷ 3) 67% 33%
Allocation of nontraceable expenses
($310,000 x 0.67 and $310,000 x 0.33, respectively) $207,700 $102,300
Ex. 13–5 Computations of revenue, expenses, and segment profit or loss for operating segments of
Canton Company for year ended Apr. 30, 2006:
Operating Operating Operating
Segment Segment Segment
A B C
Revenue:
Net sales to unaffiliated customers $500,000 $300,000 $200,000
Intersegment transfers out 80,000 40,000 20,000
Total revenue $580,000 $340,000 $220,000
Expenses:
Traceable expenses $400,000 $100,000 $200,000
Intersegment transfers in 30,000 60,000 50,000
5 3 2
Nontraceable expenses ( 10 , 10 , and 10
) 50,000 30,000 20,000
Total operating expenses $480,000 $190,000 $270,000
Segment profit (loss) $100,000 $150,000 $ (50,000)
Ex. 13–6 a. Computation of Crossley Company’s income from continuing operations for year ended
Dec. 31, 2006:
Pre-tax financial income ($600,000 ÷ 0.60) $1,000,000
Add: Loss from discontinued operations ($250,000 – $100,000) 150,000
Less: Operating income of discontinued operations prior to disposal (90,000)
Income from continuing operations before income taxes $1,060,000
Less: Income taxes expense ($1,060,000 x 0.40) 424,000
Income from continuing operations $ 636,000
b. Computation of Crossley Company’s total income taxes for year ended Dec. 31, 2006:
Pre-tax financial income (from a) $1,000,000
Income tax rate 0.40
Total income taxes (expense and allocated) $ 400,000

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136 Modern Advanced Accounting, 10/e
Ex. 13–7 Partial income statement for Tovar Company for year ended Aug. 31, 2006:
Income from continuing operations $384,000 (1)
Discontinued operations:
(Loss) from operations of discontinued Wallis Division,
including $30,000 loss on disposal (less applicable
income taxes of $8,000) (12,000)(2)
Net income $372,000
(1) $640,000 x 0.60 = $384,000
(2) [($200,000 – $150,000) – $40,000 – ($330,000 – $300,000)] x 0.60
Ex. 13–8 Partial income statement for Dispo Company for year ended June 30, 2006:
Income from continuing operations ($1,000,000 x 0.60) $600,000
Discontinued operations:
(Loss) from operating of discontinued Division 105,
including $60,000 loss on disposal (less applicable
income taxes of $92,000) (138,000)
Net income $462,000
Ex. 13–9 Partial income statement for Downsize Company for year ended Nov. 30, 2006:
Income from continuing operations before income taxes $500,000
Less: Income taxes expense 200,000
Income from continuing operations $300,000
Discontinued operations:
(Loss) from operations of discontinued Webb Division,
including $40,000 loss on disposal (less applicable
income taxes of $12,000) (18,000)
Net income $282,000
Ex. 13–10 Partial income statement for Reducto Company for year ended April 30, 2006:
Income from continuing operations before income taxes $600,000
Less: Income taxes expense 240,000
Income from continuing operations $360,000
Discontinued operations:
(Loss) from operations of discontinued Woeful Division,
including $70,000 loss on disposal (less applicable
income taxes of $108,000) (162,000)
Net income $198,000

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Solutions Manual, Chapter 13 137
Ex. 13–11 Reporting of items in Luigi Company’s quarterly income statements for 2006:
Quarter ended
Mar. 31 June 30 Sept. 30 Dec. 31
Property taxes expense $10,000 $10,000 $10,000 $10,000
Repairs expense 30,000 30,000 30,000 30,000
Market decline of inventories 420,000
Ex. 13–12 Computation of Lundy Company’s cost of goods sold for each of four quarters of year ended
Apr. 30, 2006:
Cost of
goods
Quarter ended Computation for quarter sold
July 31, 2005 (1,000 x $7.50) + (3,500 x $8) $ 35,500
Oct. 31, 2005 (1,500 x $8.00) + (5,500 x $8.50) 58,750
Jan. 31, 2006 (500 x $8.50) + (6,000 x $9) + (2,000 x $0.50) 59,250
Apr. 30, 2006 (2,000 x $8.50) + (3,500 x $8.50) 46,750
Total $200,250
Ex. 13–13 Computation of Marmon Corporation’s estimated effective combined income tax rate for year
ended April 30, 2007:
Estimated pre-tax financial income $100,000
Add: Forecasted premium expenses of officers’ life insurance 10,000
Less: Forecasted dividend received deduction (20,000)
Estimated taxable income $ 90,000
Estimated income taxes expense ($90,000 x 0.40) $ 36,000
Estimated effective income tax rate ($36,000 ÷ $100,000) 36%
Ex. 13–14 Journal entries for Basey Company:
2006
July 31 Income Taxes Expense 110,000
Income Taxes Payable 110,000
To provide for estimated federal and state income taxes for the
first quarter of Fiscal Year 2007 ($200,000 x 0.55 = $110,000).
Oct. 31 Income Taxes Expense 124,000
Income Taxes Payable 124,000
To provide for estimated federal and state income taxes for
the second quarter of Fiscal Year 2007 [($450,000 x 0.52) –
$110,000 = $124,000].
Ex. 13–15 Journal entries for Public Company:
2006
Nov. 30 Cost of Goods Sold ($210,000 – $170,000) 40,000
Liability Arising from Depletion of Base Layer of
Lifo Inventories 40,000
To record obligation to replenish temporarily depleted base
layer of last-in, first-out inventories.
Dec. 18 Inventories ($360,000 – $40,000) 320,000
Liability Arising from Depletion of Base Layer of
Lifo Inventories 40,000
Trade Accounts Payable 360,000
To record purchase of merchandise and restoration of
depleted base layer of last-in, first-out inventories.
Ex. 13–16 Journal entries for Intero Company:
2006
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138 Modern Advanced Accounting, 10/e
Mar. 31 Income Taxes Expense (500,000 x 0.386) 193,000
Income Taxes Payable 193,000
To provide for estimated income taxes for the first quarter
of 2006.
June 30 Income Taxes Expense [($1,100,000 x 0.412) – $193,000] 260,200
Income Taxes Payable 260,200
To provide for estimated income taxes for the second
quarter of 2006.
Ex. 13–17 Journal entries for Cassidy Company:
2006
Feb. 1 Inventories ($110,000 – $30,000) 80,000
Liability Arising from Depletion of Base Layer of
Lifo Inventories 30,000
Trade Accounts Payable 110,000
To record purchase of merchandise and restoration of
depleted base layer of last-in, first-out inventories.
Apr. 30 Income Taxes Expense ($340,000 – $160,000) 180,000
Income Taxes Payable 180,000
To provide for estimated income taxes for second quarter
of fiscal year ending October 31, 2006.
Ex. 13–18 Reconciliation between statutory federal income tax rate and effective income tax rate for
Farber Company for year ended Sept. 30, 2006:
Federal income tax rate 40.00%
State income tax, net of federal income tax benefit ($14,100 ÷
$100,000) = 14.1%; 14.1% x 0.60= 8.46%) 8.46
Nontaxable municipal bond interest ($4,000 ÷ $100,000) (4.00)
Other 1.60*
Effective income tax rate 46.06%
*Nondeductible expenses ($1,600 ÷ $ 100,000) 1.60%

CASES
Case 13–1 Ellen Laughlin can ethically comply with Wilbur Jackson’s instructions to include the $500,000
shipment to Wilmont Company on June 1 in Electronics, Inc.’s sales for the quarter ended May
31, 2006. Both the realized and the earned criteria for recognizing revenue, in paragraph 83 of
FASB Statement of Financial Accounting No. 5, “Recognition and Measurement in Financial
Statements of Business Enterprises,” appear to be met, in that revenue is realized through the
invoicing of the shipment to Wilmont, and revenue is earned through the production of the goods
to Wilmont’s order and making the goods available for Wilmont’s pickup. Title apparently passed
to the goods, per Sections 2401(1) and 2501(1) (b) of the Uniform Commercial Code, because
packaging and invoicing the goods to Wilmont identified the goods to the contract with Wilmont.
Laughlin, as a CPA and not an attorney, should verify her interpretation of the Uniform
Commercial Code with legal counsel for Electronics, Inc.

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Solutions Manual, Chapter 13 139
Case 13–2 There is merit to student Jeff’s assertion. Most efforts of the FASB to improve comparability
of financial information among business enterprises has centered on limiting, rather than
relaxing, the accounting policies available for enterprise management. The management
approach to segment reporting sanctioned by the FASB, which requires segmentation of
business enterprises’ activities based on the way the enterprises are managed, assures that there
will be littleif anycomparability of operating segments among business enterprises.
Further, mandating disclosure of only segment revenues and segment profit or loss, with other
disclosures subject to management’s approach to defining operating segments, suggests that a
segment-by-segment comparison of elements of financial position and operating results among
similar segments will be impossible. (Note to Instructor: The six-member FASB majority that
assented to FASB Statement No. 131 expressed views contrary to those of student Jeff in
paragraphs 57 through 70 thereof.)
Case 13–3 (Adapted from FASB Discussion Memorandum, “. . . Interim Financial Accounting and
Reporting” (Stamford, 1978), pp. 29–33):
a. Arguments in favor of the integral theory of interim financial reporting:
(1) It minimizes short-term variations among expenses that reverse or are offset in
subsequent interim periods of the same year.
(2) It facilitates a focus on annual operating results.
(3) It avoids the problems of matching interim period expenses with revenue that are
inherent in the discrete theory of interim financial reporting.
(4) It avoids wide fluctuations in period-to-period operating results, which are typical of
the discrete theory of interim financial reporting.
b. Arguments in favor of the discrete theory of interim financial reporting:
(1) It avoids the smoothing-of-income aspect of the integral theory of interim financial
reporting. Expenses such as advertising and maintenance are recognized when
incurred, as in annual financial reporting.
(2) It avoids the integral theory’s possibility of “dumping” into the fourth interim period
accruals and deferrals that were recognized in the first three interim periods but are not
appropriate at fiscal year-end.
(3) It reduces the amount of estimation of interim periods expected to be benefited by
expenditures and thus reduces the cost of providing interim financial information.
(4) It avoids using different accounting procedures for interim and for annual reporting
periods.
(5) It endorses the view that financial statements and reports for any accounting period
should reflect only the transactions and events of that period.
c. (The student’s answer should be evaluated on the quality of its support for the student’s
position.)
Case 13–4 The critics have a point. The SEC’s attempt to distinguish disclosure from generally accepted
accounting principles may be challenged by considering the following excerpt from the
AICPA’s Statement on Auditing Standards No. 58, “Reports on Audited Financial
Statements” (para. 55):
Information essential for a fair presentation in conformity with generally accepted
accounting principles should be set forth in the financial statements (which include
the related notes).
The foregoing implies that disclosure is an integral part of generally accepted accounting
principles. Thus, the plethora of SEC pronouncements in Financial Reporting Releases and
Staff Accounting Bulletins may be viewed as interpreting, if not establishing, generally
accepted accounting principles.
Case 13–5 a. There are two weaknesses in the form and content of presentation of the first-quarter
information by Nanson Company: (1) Some information in the income statement needs

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140 Modern Advanced Accounting, 10/e
further explanation, and (2) additional financial data should be presented and explained as
appropriate in the circumstances.
The major weakness in the statement for the first quarter is that it is misleading because
Nanson forecasted a net income for the year as a whole, not a net loss as would be
assumed from the first-quarter income statement alone. Both sales and production were
equal to the units forecasted for the first quarter, and if actual activity continues as planned
for the rest of the year, Nanson will have a net income of $371,250 {$450,000 –
[$175,000 x (1 – 0.55)]} for 2006. Thus, Nanson should indicate in the income statement
for the first quarter that sales, production, and net income (loss) are in line with
expectations, as related to the forecasted data and to the first quarters of prior years.
No other weakness in form and content is evident, except as discussed in b.
b. (1) The recognition of underapplied fixed factory overhead as an asset is the preferred
method of accounting. The expected year-end result is that actual production will
exactly equal forecasted production on which the standard was based; thus, no volume
variance should exist at year-end.
(2) The manner in which the operating expenses were handled in the report is the preferred
method. These costs are not inventoriable; they are not associated directly with the
product; and they have been incurred at expected levels. Thus, operating expenses
should be recognized immediately when incurred or be allocated among interim
periods based on the estimate of time expired, benefit received, or activity associated
with the interim periods.
(3) The warehouse explosion loss is an extraordinary item that should be disclosed in the
interim income statement, net of income tax effect. The $175,000 loss should be
reduced by the effective income tax reduction of $96,250 ($175,000 x 0.55 =
$96,250). Thus, the loss should reduce net income by $78,750 ($175,000 – $96,250 =
$78,750), and the nature of the loss should be explained in a note to the interim income
statement.
(4) A negative amount for income taxes expense (an income tax benefit) should have been
included in the income statement for the first quarter. The $35,000 operating loss
should have been reduced by $19,250 ($35,000 x 0.55 = $19,250), the expected tax
reduction to be realized from profitable operations during the remaining three quarters
of 2006. The potential income tax benefits resulting from losses that arise in the early
part of the year are recognized, subject to a valuation allowance if required by
paragraph 17e of FASB Statement No. 109, “Accounting for Income Taxes.”
(5) Basic and diluted earnings per share of common stock data for each interim period
presented are included in the income statement for the first quarter if a business
enterprise meets the conditions requiring both earnings per share computations.
Because Nanson has a simple capital structure, it reports only basic earnings per
share. However, Nanson should have reported per-share amounts for the loss before
extraordinary item, the extraordinary item, and the net loss.

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Solutions Manual, Chapter 13 141
20 Minutes, Easy
Wabash Company Pr. 13–1
Wabash Company
Computations of Segment Profit or Loss for Operating Segments
For Year Ended November 30, 2006
Operating Segment
Alpha Beta Gamma Delta
Revenue:
Net sales to outsiders $ 4 0 0 0 0 $ 2 0 0 0 0 $ 2 5 0 0 0 $ 5 0 0 0
Intersegment transfers out 2 0 0 0 4 0 0 0 1 0 0 0 3 0 0 0
Total revenue $ 4 2 0 0 0 $ 2 4 0 0 0 $ 2 6 0 0 0 $ 8 0 0 0
Expenses:
Intersegment transfers in $4 0 0 0 $ 3 0 0 0 $ 2 0 0 0 $ 1 0 0 0
Other traceable expenses 9 0 0 0 6 0 0 0 5 0 0 0 1 0 0 0 0
Nontraceable expenses (40%) 8 0 0 0 (30%) 6 0 0 0 (20%) 4 0 0 0 (10%) 2 0 0 0
Total expenses $ 2 1 0 0 0 $ 1 5 0 0 0 $ 1 1 0 0 0 $ 1 3 0 0 0
Segment profit (loss) $ 2 1 0 0 0 $ 9 0 0 0 $ 1 5 0 0 0 $ ( 5 0 0 0 )

40 Minutes, Medium
Cregar Company Pr. 13–2
Cregar Company
Corrected Partial Comparative Income Statements
For Three Years Ended December 31, 2006
2006 2005 2004
Income from continuing operations before
income taxes $2 2 4 0 0 0 0 (1) $1 7 0 0 0 0 0 (2) $1 1 0 0 0 0 0 (3)
Income taxes expense (4) 8 9 6 0 0 0 6 8 0 0 0 0 4 4 0 0 0 0
Income from continuing operations $1 3 4 4 0 0 0 $1 0 2 0 0 0 0 $ 6 6 0 0 0 0
Discontinued operations:
Income (loss) from operations of
discontinued business segment, including
$900,000 gain on disposal in 2006 (less
applicable income taxes of $104,000 in
2006, ($200,000) in 2005, and $80,000
in 2004) 1 5 6 0 0 0 (5) ( 3 0 0 0 0 0 )(6) 1 2 0 0 0 0 (7)

1 5 6 0 0 0 (7)
Net income $1 5 0 0 0 0 0 $ 7 2 0 0 0 0 $ 7 8 0 0 0 0

Computations:
(1) $1,600,000 + $640,000 = $2,240,000
(2) $1,200,000 + $500,000 = $1,700,000
(3) $1,300,000 – $200,000 = $1,100,000
(4) Pre-tax income x 0.40
(5) ($900,000 – $640,000) x 0.60 = $156,000
(6) $(500,000) x 0.60 = $(300,000)
(7) $200,000 x 0.60 = $120,000

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142 Modern Advanced Accounting, 10/e
45 Minutes, Medium
Lang Corporation Pr. 13–3
a. Lang Corporation
Computation of Effective Income Tax Rates
For Year Ended July 31, 2006
Year ended July 31, 2006
First Second Third Fourth
quarter quarter quarter quarter
Forecasted or actual pre-tax
financial income for year $ 8 0 0 0 0 0 $ 8 0 0 0 0 0 $ 8 0 0 0 0 0 $ 8 3 0 0 0 0

Forecasted or actual permanent


differences between pre-tax
financial income and taxable
income for year:
Dividend received deduction ( 1 5 0 0 0 0 ) ( 1 8 0 0 0 0 ) ( 1 8 0 0 0 0 ) ( 1 7 5 0 0 0 )
Lobbying expenses 2 0 0 0 0 2 0 0 0 0 2 0 0 0 0 2 0 0 0 0
Officers’ life insurance premium
expense 1 5 0 0 0 1 5 0 0 0 1 5 0 0 0 1 6 0 0 0

Forecasted or actual taxable


income for year $ 6 8 5 0 0 0 $ 6 5 5 0 0 0 $ 6 5 5 0 0 0 $ 6 9 1 0 0 0

Combined federal and state income


taxes at 40% $ 2 7 4 0 0 0 $ 2 6 2 0 0 0 $ 2 6 2 0 0 0 $ 2 7 6 4 0 0

Effective combined federal and


state income tax rates 3 4 . 3 % 3 2 . 8 % 3 2 . 8 % 3 3 . 3 %

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Solutions Manual, Chapter 13 143
Lang Corporation (concluded) Pr. 13–3
b. Lang Corporations
Journal Entries

20 05
Oct 31 Income Taxes Expense 6 1 7 4 0
Income Taxes Payable 6 1 7 4 0
To record income taxes for first quarter of Fiscal Year
2006 ($180,000 x 0.343 = $61,740).

20 06
Jan 31 Income Taxes Expense 7 2 7 4 0
Income Taxes Payable 7 2 7 4 0
To record income taxes for second quarter of Fiscal
Year 2006 as follows:
$410,000 x 0.328 $134,480
Less: Expense for first quarter 61,740
Expense for second quarter $ 72,740

Apr 30 Income Taxes Expense 6 3 9 6 0


Income Taxes Payable 6 3 9 6 0
To record income taxes for third quarter of Fiscal Year
2006 as follows:
$605,000 x 0.328 $198,440
Less: Expense for first two quarters 134,480
Expense for third quarter $ 63,960

July 31 Income Taxes Expense 7 7 9 6 0


Income Taxes Payable 7 7 9 6 0
To record income taxes payable for fourth quarter of
Fiscal Year 2006 as follows:
Total income taxes expense for 2006 $276,400*
Less: Expense for first three quarters 198,440
Expense for fourth quarter $ 77,960

* ($691,000 x 0.40) = $276,400 (or see a on page


399.)

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144 Modern Advanced Accounting, 10/e
50 Minutes, Medium
Bixier Company Pr. 13–4
Bixler Company
Income Statements
For Two Years Ended December 31, 2006
2006 2005
Net sales $7 0 8 0 0 0 0 $5 6 7 0 0 0 0
Cost of goods sold 4 0 0 0 0 0 0 3 4 0 0 0 0 0
Gross margin on sales $3 0 8 0 0 0 0 $2 2 7 0 0 0 0
Operating expenses 1 0 5 0 0 0 0 5 5 0 0 0 0
Operating income $2 0 3 0 0 0 0 $1 7 2 0 0 0 0
Other gains (losses):
Interest $ 7 0 0 0 0 $ 4 0 0 0 0
Gain on disposal of plant 1 3 0 0 0 0
Loss from flood damage ( 4 2 0 0 0 0 )
Net other gains (losses) $( 2 2 0 0 0 0 ) $ 4 0 0 0 0
Income from continuing operations before income taxes $1 8 1 0 0 0 0 $1 7 6 0 0 0 0
Less: Income taxes expense (40%) 7 2 4 0 0 0 7 0 4 0 0 0
Income from continuing operations $1 0 8 6 0 0 0 $1 0 5 6 0 0 0
Discontinued operations:
(Loss) from operations of discontinued office equipment division $( 4 2 0 0 0 0 )(1)
Less: applicable income taxes 1 6 8 0 0 0
Loss net of income taxes $( 2 5 2 0 0 0 )
Gain on disposal of office equipment division $ 1 1 0 0 0 0 (2)
Less: applicable income taxes 4 4 0 0 0
Gain net of income taxes $ 6 6 0 0 0
Net income $1 1 5 2 0 0 0 $ 8 0 4 0 0 0

Computations:
(1) $1,330,000 – $1,750,000 = $(420,000)
(2) $640,000 – ($1,450,000 – $920,000) = $110,000

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 13 145
45 Minutes, Medium
Draco Company Pr. 13–5
a. Draco Company
Income Statement
For Year Ended December 31, 2006
Net sales $10 0 0 0 0 0 0

Cost, expenses, and losses


Cost of goods sold $8 0 0 0 0 0 0
Operating expenses 8 0 0 0 0 0
Loss from bankruptcy of major customer 1 5 0 0 0 0
Judgment paid 8 0 0 0 0
Interest expense 1 0 0 0 0 0 9 1 3 0 0 0 0

Income from continuing operations before income


taxes $ 8 7 0 0 0 0

Income taxes expense ($870,000 x 0.40) 3 4 8 0 0 0


Income from continuing operations $ 5 2 2 0 0 0
Discontinued operations:
Loss from operations of discontinued
Southern Division, including $50,000
estimated loss on disposal (less applicable
income taxes) ( 1 0 2 0 0 0 )

Income before extraordinary item $ 4 2 0 0 0 0

Extraordinary item (loss from earthquake at Northern


Division), net of income tax credit of $64,000 ( 9 6 0 0 0 )

Net income $ 3 2 4 0 0 0

b. Draco Company
Journal Entry
December 31, 2006
Income Taxes Expense 3 4 8 0 0 0
Income Taxes Payable 2 1 6 0 0 0
Loss from Operations of Discontinued
Southern Division (income tax effect) 6 8 0 0 0
Extraordinary Item—Loss (income tax effect) 6 4 0 0 0
To record income taxes for 2006, including intraperiod
tax allocation.

The McGraw-Hill Companies, Inc., 2006


146 Modern Advanced Accounting, 10/e
60 Minutes, Strong
Principia Corporation Pr. 13–6
a. Principia Corporation and Subsidiaries
Information about Segment Profit or Loss and Segment Assets and Liabilities
For Year Ended December 31, 2006
(amount in thousands)
Operating Segment
Principia Seattle Boston London Total
Revenues from external customers 5 0 0 4 0 0 3 0 0 2 0 0 1 4 0 0
Intersegment revenues 4 0 3 0 2 0 1 0 1 0 0
Segment profit 1 7 8 1 8 6 4 9
Interest revenue 2 0 2 0
Segment assets 6 7 3 2 2 3 0 0 2 1 0 0 1 9 0 0 1 3 0 3 2

b. Principia Corporation and Subsidiaries


Reconciliation of Operating Segment Totals to Consolidated Totals
For Year Ended December 31, 2006
(amount in thousands)
Segment
Revenue profit Assets
Segment totals 1 5 0 0 4 9 1 3 0 3 2
Elimination of intersegment items ( 1 0 0 ) ( 3 6 ) ( 4 5 3 6 )
Unallocated interest revenue 2 0 2 0
Consolidated amounts 1 4 2 0 3 3 8 4 9 6

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 13 147
60 Minutes, Strong
Lobeck Company et al. Pr. 13–7
a. Lobeck Company
Partial Income Statement
For Year Ended April 30, 2006
Income from continuing operations before income taxes $1 1 7 0 0 0 0
Income taxes expense 4 6 8 0 0 0
Income from continuing operations 7 0 2 0 0 0
Discontinued operations:
Loss from operations of discontinued Texas
Division, including $50,000 loss on disposal
(less applicable income taxes) 1 0 2 0 0 0
Net income $ 6 0 0 0 0 0

Note to Instructor: Beginning with net income, the remaining amounts in the partial income statement
must be “backed into” after the discontinued operations amounts is computed.

b. Spratt Company
Journal Entries

20 06
Mar 31 Income Taxes Expense ($100,000 x 0.45) 4 5 0 0 0
Income Taxes Payable 4 5 0 0 0

June 30 Income Taxes Expense [($220,000 x 0.46) – $45,000] 5 6 2 0 0


Income Taxes Payable 5 6 2 0 0

Sept 30 Income Taxes Expense [($360,000 x 0.44) – $101,200] 5 7 2 0 0


Income Taxes Payable 5 7 2 0 0

Dec 31 Income Taxes Expense [($510,000 x 0.43) – $158,400] 6 0 9 0 0


Income Taxes Payable 6 0 9 0 0

c. Jackson Company
Journal Entries

20 06
Mar 31 Cost of Goods Sold ($210,000 – $120,000) 9 0 0 0 0
Liability Arising from Depletion of Base Layer
of Lifo Inventories 9 0 0 0 0

Apr 30 Inventories ($370,000 – $90,000) 2 8 0 0 0 0


Liability Arising from Depletion of Base Layer of Lifo
Inventories 9 0 0 0 0
Trade Accounts Payable 3 7 0 0 0 0

The McGraw-Hill Companies, Inc., 2006


148 Modern Advanced Accounting, 10/e