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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 Pr. 13–2 Pr. 13–3 Wabash Company (20 minutes, easy) Computation of segment profit or loss for four operating segments. Cregar Company (40 minutes, medium) Preparation of corrected income statements for three years to display discontinued operations. 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. Bixler Company (50 minutes, medium) Comparative income statements for enterprise with discontinued operations and unusual (but not extraordinary) items. Draco Company (45 minutes, medium) Income statement for enterprise with discontinued operations and extraordinary item. Principia Corporation (60 minutes, strong) Preparation of summary of information about income statement and balance sheet items of four operating segments. 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.

Pr. 13–4

Pr. 13–5 Pr. 13–6

Pr. 13–7

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. 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.

2.

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3.

4.

5.

6.

7.

8.

9.

10.

11. 12. 13. 14.

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. 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. 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. 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. 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 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. 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. 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. Regulation S-X provides accountants guidance for the form and content of financial statements and schedules required to be filed with the SEC. Regulation S-K of the SEC provides guidance for the non-financial statement disclosure requirements in the various Forms filed with the SEC. Financial Reporting Releases are pronouncements issued by the SEC that state its views on financial accounting matters. 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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SOLUTIONS TO EXERCISES
Ex. 13–1 1. b 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. c [$60,000 – ($150,000 x 0.20) = $30,000] b [$125,000 – ($180,000 x 0.25) = $80,000] a a d [($50,000 + $15,000 + $150,000 + $1,750,000) – $1,000,000 = $965,000] c d [$700,000 + ($60,000 x 0.60) + ($150,000 x 0.60) = $826,000] a d a a b d a b [($170,000 x 0.45) – ($130,000 x 0.40) = $24,500] a b e c 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 Computation of segment profit for Rinker Company’s Segment No. 1 for 2006: Segment sales Less: Segment traceable expenses Subtotal Less: Allocated nontraceable expenses ($600,000 x 0.60) Segment profit $900,000 400,000 $500,000 360,000 $140,000

Ex. 13–3

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Ex. 13–4

Computation of allocation of nontraceable expenses of Coopers Company for year ended June 30, 2006: Chemicals segment Net sales percentages ($1,400,000/$2,000,000 and $600,000/$2,000,000) Payroll percentages ($150,000/$250,000 and $100,000/$250,000) Average plant assets and inventories percentages ($710,000/$1,000,000 and $290,000/$1,000,000) Totals Average percentages (÷ 3) Allocation of nontraceable expenses ($310,000 x 0.67 and $310,000 x 0.33, respectively) 70% 60 71 201% 67% $207,700 Sporting goods segment 30% 40 29 99% 33% $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 Segment A Revenue: Net sales to unaffiliated customers Intersegment transfers out Total revenue Expenses: Traceable expenses Intersegment transfers in 5 3 Nontraceable expenses ( 10 , 10 , and Total operating expenses Segment profit (loss) $500,000 80,000 $580,000 $400,000 30,000 50,000 $480,000 $100,000 Operating Segment B $300,000 40,000 $340,000 $100,000 60,000 30,000 $190,000 $150,000 Operating Segment C $200,000 20,000 $220,000 $200,000 50,000 20,000 $270,000 $ (50,000)

2 10

)

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) Add: Loss from discontinued operations ($250,000 – $100,000) Less: Operating income of discontinued operations prior to disposal Income from continuing operations before income taxes Less: Income taxes expense ($1,060,000 x 0.40) Income from continuing operations $1,000,000 150,000 (90,000) $1,060,000 424,000 $ 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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Ex. 13–7

Partial income statement for Tovar Company for year ended Aug. 31, 2006: Income from continuing operations Discontinued operations: (Loss) from operations of discontinued Wallis Division, including $30,000 loss on disposal (less applicable income taxes of $8,000) Net income (1) $640,000 x 0.60 = $384,000 (2) [($200,000 – $150,000) – $40,000 – ($330,000 – $300,000)] x 0.60 $384,000 (1)

(12,000)(2) $372,000

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) Discontinued operations: (Loss) from operating of discontinued Division 105, including $60,000 loss on disposal (less applicable income taxes of $92,000) Net income $600,000

(138,000) $462,000 $500,000 200,000 $300,000

Ex. 13–9

Partial income statement for Downsize Company for year ended Nov. 30, 2006: Income from continuing operations before income taxes Less: Income taxes expense Income from continuing operations Discontinued operations: (Loss) from operations of discontinued Webb Division, including $40,000 loss on disposal (less applicable income taxes of $12,000) Net income

(18,000) $282,000 $600,000 240,000 $360,000

Ex. 13–10 Partial income statement for Reducto Company for year ended April 30, 2006: Income from continuing operations before income taxes Less: Income taxes expense Income from continuing operations Discontinued operations: (Loss) from operations of discontinued Woeful Division, including $70,000 loss on disposal (less applicable income taxes of $108,000) Net income

(162,000) $198,000

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Ex. 13–11 Reporting of items in Luigi Company’s quarterly income statements for 2006: Quarter ended Mar. 31 June 30 Sept. 30 Property taxes expense $10,000 $10,000 $10,000 Repairs expense 30,000 30,000 30,000 Market decline of inventories 420,000

Dec. 31 $10,000 30,000

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 36% Estimated effective income tax rate ($36,000 ÷ $100,000) Ex. 13–14 Journal entries for Basey Company: 2006 July 31 Income Taxes Expense Income Taxes Payable 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 Income Taxes Payable 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].

110,000 110,000

124,000 124,000

Ex. 13–15 Journal entries for Public Company: 2006 Nov. 30 Cost of Goods Sold ($210,000 – $170,000) Liability Arising from Depletion of Base Layer of Lifo Inventories To record obligation to replenish temporarily depleted base layer of last-in, first-out inventories. Dec. 18 Inventories ($360,000 – $40,000) Liability Arising from Depletion of Base Layer of Lifo Inventories Trade Accounts Payable To record purchase of merchandise and restoration of depleted base layer of last-in, first-out inventories.

40,000 40,000

320,000 40,000 360,000

Ex. 13–16 Journal entries for Intero Company: 2006
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Mar. 31

Income Taxes Expense (500,000 x 0.386) Income Taxes Payable To provide for estimated income taxes for the first quarter of 2006. Income Taxes Expense [($1,100,000 x 0.412) – $193,000] Income Taxes Payable To provide for estimated income taxes for the second quarter of 2006.

193,000 193,000

June 30

260,200 260,200

Ex. 13–17 Journal entries for Cassidy Company: 2006 Feb. 1 Inventories ($110,000 – $30,000) Liability Arising from Depletion of Base Layer of Lifo Inventories Trade Accounts Payable To record purchase of merchandise and restoration of depleted base layer of last-in, first-out inventories. Income Taxes Expense ($340,000 – $160,000) Income Taxes Payable To provide for estimated income taxes for second quarter of fiscal year ending October 31, 2006. 80,000 30,000 110,000

Apr. 30

180,000 180,000

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 State income tax, net of federal income tax benefit ($14,100 ÷ $100,000) = 14.1%; 14.1% x 0.60= 8.46%) Nontaxable municipal bond interest ($4,000 ÷ $100,000) Other Effective income tax rate *Nondeductible expenses ($1,600 ÷ $ 100,000) 1.60% 40.00% 8.46 (4.00) 1.60* 46.06%

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

Pr. 13–1

Delta 5 0 0 0 3 0 0 0 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 )

1 1 0 (10%) 2 $ 1 3 $ ( 5

40 Minutes, Medium Cregar Company Cregar Company Corrected Partial Comparative Income Statements For Three Years Ended December 31, 2006
2006 Income from continuing operations before income taxes Income taxes expense (4) Income from continuing operations 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) $2 2 4 0 0 0 0 (1) 8 9 6 0 0 0 $1 3 4 4 0 0 0 2005 $1 7 0 0 0 0 0 (2) 6 8 0 0 0 0 $1 0 2 0 0 0 0 2004

Pr. 13–2

$1 1 0 0 0 0 0 (3) 4 4 0 0 0 0 $ 6 6 0 0 0 0

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 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 $1 5 0 0 0 0 0 $ 7 2 0 0 0 0 $ 7 8 0 0 0 0

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45 Minutes, Medium Lang Corporation
a. Lang Corporation Computation of Effective Income Tax Rates For Year Ended July 31, 2006 Year ended July 31, 2006 First Second Third quarter quarter quarter $ 8 0 0 0 0 0 $ 8 0 0 0 0 0 $ 8 0 0 0 0 0

Pr. 13–3

Fourth quarter $ 8 3 0 0 0 0

Forecasted or actual pre-tax financial income for year Forecasted or actual permanent differences between pre-tax financial income and taxable income for year: Dividend received deduction Lobbying expenses Officers’ life insurance premium expense Forecasted or actual taxable income for year Combined federal and state income taxes at 40% Effective combined federal and state income tax rates

( 1 5 0 0 0 0 ) 2 0 0 0 0 1 5 0 0 0

( 1 8 0 0 0 0 ) 2 0 0 0 0 1 5 0 0 0

( 1 8 0 0 0 0 ) 2 0 0 0 0 1 5 0 0 0

( 1 7 5 0 0 0 ) 2 0 0 0 0 1 6 0 0 0

$ 6 8 5 0 0 0

$ 6 5 5 0 0 0

$ 6 5 5 0 0 0

$ 6 9 1 0 0 0

$ 2 7 4 0 0 0

$ 2 6 2 0 0 0

$ 2 6 2 0 0 0

$ 2 7 6 4 0 0

3 4 . 3 %

3 2 . 8 %

3 2 . 8 %

3 3 . 3 %

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Lang Corporation (concluded) b. Lang Corporations Journal Entries
20 05 Oct 31 Income Taxes Expense Income Taxes Payable 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 Income Taxes Payable 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 Apr $ 72,740 6 3 9 6 0

Pr. 13–3

6 1 7 4 0 6 1 7 4 0

7 2 7 4 0 7 2 7 4 0

30 Income Taxes Expense Income Taxes Payable 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

6 3 9 6 0

July

31 Income Taxes Expense Income Taxes Payable 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

7 7 9 6 0 7 7 9 6 0

* ($691,000 x 0.40) = $276,400 (or see a on page 399.)

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

Pr. 13–4

2005 $5 6 7 0 0 3 4 0 0 0 $2 2 7 0 0 5 5 0 0 $1 7 2 0 0 $

0 0 0 0 0

0 0 0 0 0

4 0 0 0 0

$ $1 7 7 $1 0

4 6 0 5

0 0 4 6

0 0 0 0

0 0 0 0

0 0 0 0

$( 4 2 0 0 0 0 )(1) 1 6 8 0 0 0 $( 2 5 2 0 0 0 ) $ 1 1 4 $ 6 $1 1 5 0 4 6 2 0 0 0 0 0 0 0 0 0 (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

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45 Minutes, Medium Draco Company a. Draco Company Income Statement For Year Ended December 31, 2006
Net sales Cost, expenses, and losses Cost of goods sold Operating expenses Loss from bankruptcy of major customer Judgment paid Interest expense Income from continuing operations before income taxes Income taxes expense ($870,000 x 0.40) Income from continuing operations Discontinued operations: Loss from operations of discontinued Southern Division, including $50,000 estimated loss on disposal (less applicable income taxes) Income before extraordinary item Extraordinary item (loss from earthquake at Northern Division), net of income tax credit of $64,000 Net income

Pr. 13–5

$10 0 0 0 0 0 0

$8 0 0 0 0 8 0 0 0 1 5 0 0 8 0 0 1 0 0 0

0 0 0 0 0

0 0 0 0 0

9 1 3 0 0 0 0

$ 8 7 0 0 0 0 3 4 8 0 0 0 $ 5 2 2 0 0 0

( 1 0 2 0 0 0 ) $ 4 2 0 0 0 0

( 9 6 0 0 0 ) $ 3 2 4 0 0 0

b.

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

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60 Minutes, Strong Principia Corporation
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)
Principia Revenues from external customers Intersegment revenues Segment profit Interest revenue Segment assets 5 0 4 1 2 6 7 3 0 0 7 0 2 Operating Segment Seattle Boston 4 0 0 3 0 8 2 3 0 0 3 0 0 2 0 1 8 2 1 0 0 London 2 0 0 1 0 6 1 9 0 0

Pr. 13–6

Total 1 4 0 0 1 0 0 4 9 2 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)
Revenue Segment profit 4 9 ( 3 6 ) 2 0 3 3 Assets 1 3 0 3 2 ( 4 5 3 6 ) 8 4 9 6

Segment totals Elimination of intersegment items Unallocated interest revenue Consolidated amounts

1 5 0 0 ( 1 0 0 ) 2 0 1 4 2 0

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60 Minutes, Strong Lobeck Company et al. a. Lobeck Company Partial Income Statement For Year Ended April 30, 2006
Income from continuing operations before income taxes Income taxes expense Income from continuing operations Discontinued operations: Loss from operations of discontinued Texas Division, including $50,000 loss on disposal (less applicable income taxes) Net income

Pr. 13–7

$1 1 7 0 0 0 0 4 6 8 0 0 0 7 0 2 0 0 0

1 0 2 0 0 0 $ 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) Income Taxes Payable June 30 Income Taxes Expense [($220,000 x 0.46) – $45,000] Income Taxes Payable 30 Income Taxes Expense [($360,000 x 0.44) – $101,200] Income Taxes Payable 31 Income Taxes Expense [($510,000 x 0.43) – $158,400] Income Taxes Payable

4 5 0 0 0 4 5 0 0 0 5 6 2 0 0 5 6 2 0 0 5 7 2 0 0 5 7 2 0 0 6 0 9 0 0 6 0 9 0 0

Sept

Dec

c.

Jackson Company Journal Entries
20 06 Mar 31 Cost of Goods Sold ($210,000 – $120,000) Liability Arising from Depletion of Base Layer of Lifo Inventories Apr 30 Inventories ($370,000 – $90,000) Liability Arising from Depletion of Base Layer of Lifo Inventories Trade Accounts Payable

9 0 0 0 0 9 0 0 0 0 2 8 0 0 0 0 9 0 0 0 0 3 7 0 0 0 0

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Modern Advanced Accounting, 10/e