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CHAPTER 13 SEGMENT AND INTERIM REPORTING

ANSWERS TO QUESTIONS Q13-1 Information on a company's operations in different industries would be helpful to investors in their assessments concerning the different profit rates, different degrees and types of risk, and different opportunities for growth of each of the different industries. In general, this breakdown helps the investors look behind the consolidated totals to the individual components that comprise the company. Q13-2 The relationship between the FASB's segment disclosure requirements and a company's profit centers focuses on the management viewpoint in FASB 131. The FASB requires that the definitions of operating segments used for internal decision-making purposes be used for presenting segment information for financial statement purposes. Q13-3 The three ten percent significance tests used to determine reportable segments under FASB 131 are the 10 percent revenue test, the 10 percent operating profit (loss) test, and the 10 percent assets test. For the 10 percent revenue test, the numerator and denominator are as follows: Each operating segment's total revenue (including intersegment transfers and sales) Combined revenue of all operating segments (including intersegment transfers and sales) For the 10 percent profit (loss) test, the numerator and denominator are as follows: Each operating segment's profit (loss) Absolute value of the combined profit or combined losses of the operating segments (whichever is greater) For the assets test, the numerator and denominator are as follows: Each operating segment’s assets Combined assets of all industry segments Q13-4 Whatever items are used for internal decision-making purposes to measure the operating segment’s profit or loss shall be reported in the external disclosure. Q13-5 Any segments passing one of the 10 percent tests would also be disclosed. The lower limit for the number of segments to be disclosed is set by the 75 percent revenue test. If the assumption is made that the largest four segments fail the 75 percent test and the largest five segments pass the 75 percent test, then the five segments should be separately reported. The remaining segments, if they fail the 10 percent tests, are combined under the heading of "Other Segments" and not defined further. Q13-6 First, FASB 131 specifies that all companies should disclose revenues and long-lived, productive assets domestically and, in total, for all foreign
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activities. The two materiality tests applied to country-based foreign operations are the 10 percent revenue test and the 10 percent long-lived asset test. The profit or loss test is not used for foreign operations because of the many differences in tax structures and accounting practices in different geographic areas. Q13-7 A company must disclose for each of its significant customers the amount of sales to these customers and the associated industry segment. The names of the individual customers need not be disclosed, although some companies do disclose the names of the customers. Q13-8 Interim reports can be used by investors to identify a company's seasonal trends by identifying the pattern of revenue and expenses as they occur each interim period. Q13-9 The discrete view of interim reporting holds each interim period as a basic accounting period to be evaluated as if it were an annual accounting period. Any end-of-period adjustments and deferrals would be determined using the same accounting principles used for the annual report. The integral view of interim reporting holds each interim period as an installment of an annual period. Recognition and adjustment of certain income or expense items may be affected by judgments about the expected results of the entire year's operations. APB Opinion 28 uses the integral view of interim reporting. Q13-10 Revenue from products sold or services rendered should be recognized as earned during an interim period on the same basis as followed for the full year. Revenue from seasonal businesses cannot be manipulated to eliminate seasonal trends. Q13-11 Those costs and expenses that are associated directly with or allocated to the products sold or to the services rendered for annual reporting purposes should be treated similarly for interim reporting purposes. The following practical modifications are allowed to the general rule: a. Estimated gross profit rates may be used to determine an interim period's cost of goods sold. Temporary reductions of inventories expected to be replaced by the end of the fiscal year should not be expensed through cost of goods sold at historical cost if the company uses the lifo inventory valuation method. The expected replacement cost of the liquidated portion of the lifo base should be used for the interim period's cost of goods sold.

b.

c.

Inventory losses due to a decline in market prices are recognized in the period of decline using the lower-of-cost-or-market valuation method. Recoveries of market prices in later interim periods of the same fiscal year should be recognized as gains (recoveries of prior losses) in the later interim period. d. Companies using a standard cost system for inventories should use the same procedures for computing and reporting variances in an interim period as used for the fiscal year. Purchase price variances or volume or capacity variances that are expected to be absorbed by the end of the fiscal year should be deferred at the interim period and should not be included in the interim income. Costs and expenses other than product costs should be charged to income in interim periods as incurred or be allocated among interim periods based on an
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estimate of the time expired, benefit received, or activity associated with the periods. Q13-12 The application of the lower-of-cost-or-market valuation method differs between interim statements and annual statements when temporary market declines are expected to reverse by the end of the fiscal year. When a temporary market decline is experienced, the decline need not be recognized at the interim date because no loss is expected for the fiscal year. Q13-13 The integral theory of interim reporting would allocate the expenditure over the interim periods benefitted. Thus, a portion of the $200,000 might be recognized over one or more interim periods. The discrete theory of interim reporting would recognize the entire $200,000 in the interim period when the expenditure was made. Q13-14 At the end of the second interim period, the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis. The effective tax rate should reflect anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives. In arriving at this effective tax rate, no effect should be included for the tax related to significant unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year. Q13-15 If the future realizability of the tax benefit is not assured beyond a reasonable doubt, the tax benefit is not shown in the interim statements. Q13-16 Extraordinary items should be disclosed separately, included in the determination of net income for the interim period in which they occur, and shown net of applicable taxes. In determining materiality, extraordinary items should be related to the estimated income for the full fiscal year. Q13-17 If a change in depreciation accounting is made, the prior interim reports must be restated as if the change had been made effective as of the first day of the fiscal year. The effect of this provision is to make all changes effective as of the beginning of the fiscal period and to use the new accounting method to present all interim reports for the fiscal year. Pro forma earnings per share figures are required to allow comparison with prior years' interim income statements.

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SOLUTIONS TO CASES C13-1 Segment Disclosures [CMA Adapted]

a. The purpose for requiring segment information to be disclosed in financial statements is to assist financial statement users in analyzing and understanding the enterprise's financial statements by permitting better assessment of the enterprise's past performances and future prospects. b. The determination of the segments appropriate for an enterprise is the responsibility of management; that is, management should use its judgment in deciding how to report its segment information. Specific character-istics or sets of characteristics management can use in determining how to group its products into segments include the following: 1. Use of existing profit centers. as a

2. A segment shall be regarded as significant and identified reportable segment if one or more of the following are satisfied: i. 10% or more of the total revenue is derived from one segment. ii. 10% or more of the greater in absolute amount of the aggregate profits or aggregate losses is contributed by the segment. iii. 10% of the combined assets can be associated with the segment.

3. Management has the ability to define the breakdown of the segments, but the segment definitions used for external purposes must be the same as used for internal decision making purposes.

c.

The options available to Chemax Industries are as follows: 1. Segment by product line__antihistamines. This single product meets the 10 percent test and can be anticipated as a significant product line in the future. 2. Segment by product group__pharmaceutical, medical instruments, and medical supplies. Antihistamines can be carried as a part of the pharmaceutical group. 3. Disaggregate pharmaceutical into ethical and proprietary drugs and carry antihistamines under whichever industry segment is appropriate (probably proprietary drugs, in this case).

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C13-2

Matching Revenue and Expenses for Interim Periods

a. Revenue, product costs, gains, and losses should be recognized for interim periods on the same bases as for an annual period. These items should be recognized in the period earned or incurred and should not be deferred or allocated to other interim periods. b. Cost of goods sold and inventory valuation requires several estimations because physical counts typically are not made for interim periods. Cost of goods sold may be estimated using the gross profit method. Temporary liquidations of lifo layers are priced using the replacement costs of the goods, not the lifo cost. Temporary reductions in the market value below cost under the lower-of-cost-or-market rule do not need to be recognized in an interim period. However, reductions in value that may be permanent must be recognized. A loss recovery is allowed for recoveries of market value from one interim to another. c. Period costs are those such as depreciation or other amortizations and allocations. These should be allocated to each interim period based on a reasonable allocation method such as straight-line or percentage of the interim period's revenue to expected annual revenue. d. Accounting treatment for interim statements: 1. Long-term contracts__These contracts are accounted for on the same basis as for the annual period. Percentage of completion estimates are made each interim and gross profit is recognized. If the completed contract method is used, then profit is recognized only for projects completed within the interim period. 2. Advertising costs__These costs may be capitalized and allocated to the interim periods that benefit. However, no advertising costs are deferred beyond the end of the annual fiscal period. The allocation should be on a reasonable basis such as the percentage of interim revenue to expected annual revenue. Advertising costs or other costs that will benefit more than one interim period may be deferred under the integral approach used for interim reporting. 3. Seasonal revenue__Revenue must be recognized in the period earned. The company may not defer revenue from one interim to another in an attempt to smooth the revenue stream. 4. Flood loss__Extraordinary items must be recognized in the interim period in which the event occurs. 5. Annual major repairs and maintenance__Unusually large and nonrecurring costs may be capitalized to the asset and carried past the end of the fiscal period. However, normal maintenance and repairs may not be carried beyond the end of the fiscal year. Some accountants account for repairs on an interim basis by charging each of the interim periods with a proportionate amount of the annual repair cost and establishing an allowance for repairs contra account to the plant and equipment account. The expenditure is then charged against the allowance account. Other accountants would charge the entire cost off in the interim period in which the expenditure is made.

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For the reportable segments of Bennett Inc. The calculations for the segments of Bennett Inc.06 . in absolute amounts.17 Yes Plumbing Products . For each segment.16 .300). this criterion would be met. the assets test is met for that specific segment. McGraw-Hill/Irwin © The McGraw-Hill Companies. Segment Disclosures in the Financial Statements [CMA Adapted] following A subdivision of an entity is a reportable segment if one of the tests are met. Inc. which does not meet any of the tests.11 . The absolute value of profit or loss is ten percent or more of the greater of either the total profit of segments that did not incur a loss or the total.02 .04 No Revenue Profit Assets Reportable b. the segment profit or loss test is met for that specific segment. the combined revenue from sales to unaffiliated customers of all reportable segments must be at least 75 percent of the total sales for the company as a whole. to represent a substantial portion of total operations.300 and represent approximately 96 percent of the company's total sales ($44.16 .03 .200. the revenue test is met for that specific segment. which includes intersegment revenue.73 . divide the absolute value of the profit or loss by the sum of the segment profits of $6.000. divide the value of the assets by total assets of $100. Assets are ten percent or more of total assets. both unaffiliated and intersegment revenue.300 / $46. Bennett Inc. is ten percent or more of total revenue. of the segments that did incur a loss. divide the sum of the unaffiliated sales and intersegment sales by total company sales of $63.67 . For each of Bennett's segments.000. If the result is ten percent or more. If the result is ten percent or more. 20X5 Power Tools . For each segment. See the results of all the tests in the table below. 2. yield results which show that all segments are reportable with the exception of Security Systems. If the result is ten percent or more. Revenue. Results of Required Tests for Determining Segment Reporting For the Year Ended December 31. Since the sales to unaffiliated customers of Bennett's reportable segments are $44.50 Yes Fastening Systems . 3.C13-3 a..10 .06 Yes Security Systems .23 Yes Household Products . 2002 .08 . 1.

they would be considered one operating segment for external disclosure purposes under FASB 131. If the revenues or the long-lived assets in any individual country are material. Management does have the flexibility to determine the basis of assigning revenues to specific countries. company's management was reluctant to disclose information about the Canadian operation's profitability because of the desire to maintain its economic competitiveness. company. publicly held U. Thus. The company could still be required to disclose revenue information about the pasta product line. if in the next year. FASB 131 requires separate disclosure of total revenues from external customers attributed to the domestic operations and the total attributed to all foreign operations.S. then the company’s management would not be able to use this argument. Under FASB 131. Therefore. This is an actual case adapted from experiences with a large. Then. Thus. domestic market even though the product may have been manufactured in Canada. in this case.C13-4 Determining Industry and Geographic Segments a. management could aggregate the two product lines in the same operating segment for internal decision-making purposes. In addition. the company may choose not to include it as a separately reportable segment. 2002 .S. For example. Inc. b. The U. However. One interpretation the company could use to postpone separately disclosing detailed information about its pasta business is to argue that the pasta business passed one of the 10 percent tests in the current year because of some unusual. then separate disclosure of the material revenues or significant amount of long-lived assets must be made for those specific countries. McGraw-Hill/Irwin © The McGraw-Hill Companies. FASB 131 did not specifically state a measure of materiality to be used in assessing foreign operations. However. if a segment becomes reportable in a single period because of some significant one-time events. would be assignable to the U. company must present its segmental disclosures based on the definition of operating segments as used for internal decision making. one-time events that are not expected to continue. disclosure is required of the total of longlived assets located in the country of the domestic operations and the total long-lived assets in all foreign countries. management may argue that the revenues should be based on the point-of-sale to the eventual consumer. FASB 131 also requires separate disclosure of revenues by product line. because the two product lines were in one operating segment for internal decision-making purposes. sales of the pasta products in the U.S.S.S. if the management of the company felt that the two product lines were sufficiently comparable. the U. the pasta business continues to meet the separately reportable segment tests. and because of fear that Canadian authorities might want to increase regulation of non-Canadian owned companies operating in Canada. c..

" then "Select Quick Forms Lookup. (Hint: Provided the students have selected a public company as instructed in the case. The interim financial statements and footnotes are entirely unaudited. McGraw-Hill/Irwin © The McGraw-Hill Companies.sec. Research Related to Interim Reporting Internet URL: http://www. if required. As the interim financial statements are unaudited. All SEC filings for publicly held firms are available in this database and the filings can be easily printed off for further use. C13-6 a & b. 2002 . your students may simply use a web browser to do a search for a specific company. the user is able to select "Search the EDGAR Database. Alternatively. no report from the independent public accountants is provided in the Form 10-Q.htm The above Internet address provides access to the EDGAR database homepage. A great amount of information can be found on a company’s homepage ranging from financial information to product information and company profiles. EDGAR is a comprehensive database of SEC filings for all publicly held firms..com/fortune/fortune500/ This site has links to each of the homepages of the Fortune 500 companies as well as financial information on each of the firms.C13-5 Research Related to Segment Reporting a. Inc.gov/edgarhp. finding the Form 10-Q is easy. In comparison to the Form 10-K.sec. B." The user can then select to search for a company form. From the homepage. The search can provide a list of all forms on EDGAR for the company using the data range of "entire database" available. The internet address for many companies includes their company name. A good frontend site for the Fortune 500 companies is located at http://www.gov and EDGAR can be accessed from there.fortune. The URL is http://www. several differences in Form 10-Q are noted.) Simply request "all" or just "10-Q" forms in the search.

SOLUTIONS TO EXERCISES E13-1 a. b.3% $750.185.000 x . the 75 percent test is met.500 ($775. excluding loss segments x .10) b c All segments but Electronics and Sporting Goods are separately reportable.. Revenue from unaffiliated customers of reportable segments Total revenue from unaffiliated customers Yes. Inc.000 = 87.500 ($1.000 McGraw-Hill/Irwin © The McGraw-Hill Companies. Reportable Segments Segment Electronics Bicycles Sporting Goods Home Appliances Gas and Oil Glassware Hardware a Revenuea No Yes No Yes Yes No Yes Profit (loss)b No Yes No Yes Yes Yes Yes Assetsc No Yes No Yes Yes No Yes Segment revenue greater than $77.370 ($103. = $655.000 x . The 75 percent test is applied to revenue from unaffiliated customers.10) Segment assets greater than $118. 2002 .10) Segment profit or loss greater than $10.700 total profit.

b d c c d a $260. Inc.800.000 (280.000] Operating profit Segment B 300.000) (90.000 Total 900.000) x .000 (1.000 + $60.000 (325.000) 50.000 / $300.000 (600. 9. 6. d a Sales ($1. 11. 2002 . b Multiple-Choice Questions on Segment Reporting [AICPA Adapted] Sales Traceable operating expenses Indirect operating expenses (3/4 x $120.000 400. 10.000) 200.000.000 20X2 Total $1.000 $ 2.000..000 = [($2.000) 30.000) x $500.000 / $600.000)] McGraw-Hill/Irwin © The McGraw-Hill Companies. 8.000 $ (30.000] Operating profit Segment 3 $1.000) $ 480.000) 335. 12.000 $ 4. c a Sales Traceable costs $ Allocated costs [($400.10] [.800.E13-2 1.10 x ($1.200.000 7.000 x .000) $ 60. c Sales Traceable costs Income before allocable costs Cost allocated [($60.000 (600.200.000 $ $ 5. 3.000) $ 300.000] Operating profit $ 150.080.000) Operating profit $ 750.000 / $1.000 + $600.000) x $150.000 (240.000) x $350.000 + $180.60) Traceable costs Income before common costs Cost allocated [($480.000) $ 600.000 $ (350.000 200.

. Inc. McGraw-Hill/Irwin © The McGraw-Hill Companies. 20X5. gains and losses arising from events such as discontinued operations. 8. 2.000 of property taxes should be allocated to all interim periods.000/4) + ($300. 9. or $20. 2002 . 11. d c a b c a a b b b b Multiple-Choice Questions on Interim Reporting [AICPA Adapted] $145. 3. unusual or infrequent events. the entire $100. For the six months ended June 30. as an expense. 4. 5.000. 10.000/3)] According to APB 28. However. In the case of Park Corp. 20X5.E13-3 1.000 = [($180.000. expenses incurred in one interim period which benefit other interim periods should be allocated to the interim periods benefitted. the $40.. 6. a total of $120. and extraordinary items should be reported in the interim period in which the event occurs.000 should be included in the determination of Park's net income for the six months ended June 30. 20X5. Therefore.000 net loss from the disposal of the business segment should be recognized as a loss for the six months ended June 30. Park should recognize 50% of the $40. 7. On the other hand.

040 5.672 McGraw-Hill/Irwin © The McGraw-Hill Companies. Inc.80 actual cost of replacement 768 12.760 = 640 units x $9 ($21 replacement cost less $12 lifo cost) 16.760 b.20 difference between actual and estimated replacement cost $12.672 = 640 units x $19.680 Excess of Replacement Cost over LIFO Cost of Inventory Liquidation 5. 2002 .680 = 640 units x $12 lifo cost $768 = 640 units x $1.040 = 920 units x $12 lifo cost $5. Temporary LIFO Liquidation Cost of Goods Sold Inventory Excess of Replacement Cost over LIFO Cost of Inventory Liquidation Sold 920 units of lifo base of which 640 units will be replaced: $11. Inventory 7.760 Cost of Goods Sold Accounts Payable Replace 640 units of lifo base: $7.E13-4 a..800 11.

500 x $.000 x $10.00.000 x $.00 = $51.000 x $. Inc.300 III $15.000 x $9.100 IV $19.050 (500 x $10.800 (6.90) - = 19.200 (1.20) $10.20 original cost $1.000 x $.800 Note that $10.10) write down to $10.10) recovery to $10.500 x $10.20) write down from $10.20 is unit cost from 20X1 $5.000 Quarter I + = II - = 4.30) write down to $9. If further inventory market declines are suffered in the early quarters during 20X3.E13-5 Inventory Write-Down and Recovery Cost of Units Sold $10.10) + Inventory Adjustment to Market $800 (8.800 $51.000 x $10.00 effectively became the new unit cost basis for the inventory items as of December 31.10) recovery to $10.20) + = 17.00 = Cost of Goods Sold $11.000 x $.000 (5.20) + $800 (4.400 Total Annual basis: $51. McGraw-Hill/Irwin © The McGraw-Hill Companies.10 $750 (7. recoveries will be permitted only to the extent of $10.90 $400 (4.800 (2.300 (1..20 to $10. 20X2. 2002 .

000 $ 50.10) or more must be separately reported.50 $ 20.1 7.25 x $200.000 3.000 252.000 .300 ($793.000 x .182.000 x .000 x .9 Geographical Area U.000 / $100.000 $793. Inc.1 7.45 = $ 76..000) x Operating loss in first quarter Tax benefit in first quarter $ 40. c c .000 Consolidated Assets $1.000 x .500 $130. 10) or more must be separately reported.S.500 Net operating loss credit ($100.000 72. c 4.000 58.8 9.000.000 45.000 Percent of Consolidated Revenue of $793.000 Reportable U.40) Other tax credit Total credits â Estimated annual operating loss Tax benefit rate ($50.000 x .200 ($1.000 43.9% 31.3 5.182.182.000 Australia 75.000 â$100.000) Third quarter $ 24.E13-6 Multiple-Choice Questions on Income Taxes at Interim Dates [AICPA Adapted] 1.40 = (52.000 = $50.6 6.000 Israel 66.1% 37.000 10. All countries having material sales to unaffiliated customers of $79.000 47.000 Brazil 93.3 Yes Yes No No No All geographic areas reporting long-lived assets of $118. $ 509.S.000 Britain 439. 2.000 $ 10. Percent of Total LongGeographical Long-Lived Lived Assets Separately Area Assets of $1. E13-7 Significant Foreign Operations Sales to Unaffiliated Customers $364.9 5. McGraw-Hill/Irwin © The McGraw-Hill Companies. Britain Brazil Israel Australia Consolidated Revenue Separately Reportable Yes Yes No No No Note that the country-based revenue test is based on sales to unaffiliated customers. a b $170. 5. 2002 .

000 Computer software Computer software E13-9 a.000 Income Tax Payable Record first-quarter tax provision: $144. 2002 .100.000 ($43.E13-8 Major Customers Major customers are those to whom sales equal or exceed $4. However.200. counties are not under the common control of the state government.10).480.50 $ 740.500.500.000 b.300. Service contracts $6.000) $1.000 = .000 x .000 x .000) (20.000) $ 720.900.000 = $300.000 $ 60.650. Inc.000 .48 $1.000 + $2.400.000. Estimated Annual Tax Rates Estimated Annual Amounts Income from continuing operations Adjustment for permanent differences: Add: Premium for life insurance Less: Dividends excluded Estimated annual taxable income Combined tax rate Estimated annual taxes before credits Deduct business tax credit Estimated income taxes for year Estimated effective annual tax rate = $720.000 under common control) $4.000 $5.000 / $1.. Government units under common control are classified as a single customer.000 (80. Income Tax Expense 144.48 effective tax rate 144.000 ($3.000 (20.000 McGraw-Hill/Irwin © The McGraw-Hill Companies.

45 .E13-10 Operating Loss Tax Benefits Income (Losses) Before Taxes YearPeriod to-Date $(100.($10 + $40 + $10 + $30) Note that the operating profit of the Finance segment includes interest expense.000 Est.000) $(40.5 Separately Reportable Yes Yes No both from not the the $ = $850 .40 .000 540. Interest expense.000) 71.000 (8.($180 + $10 + $80 + $30) = $100 .000 $243.000 140. is not included in this company for nonfinancing segments.000) $(40. 2.5% 30.000) (8.1 7. 2002 .40 . The intersegment interest revenue is included as part of the revenue of the Textiles segment because chief operating decision maker has defined segment profit for manufacturing segments to exclude financing information.000 (20. McGraw-Hill/Irwin © The McGraw-Hill Companies. Revenue Operating Segment Textiles Paper Goods Finance Total Percent of Combined Revenue of $1.000) 32.($400 + $30 + $100 + $40) = $410 .000 400.000 63.000) $(100. Inc.45 Tax (Benefit) Less Reported YearPrevious in to-Date Provided Period $(40.000 Period 1 2 3 4 Total E13-11 a.0% 27. Annual Effect Tax Rate .4 Separately Reportable Yes Yes No Revenue $ 850 410 100 $1.000) 160.000 63.360 Note that the combined revenue of the Finance segment includes interest revenue from external parties and interest revenue intersegment financing..5 2.000 180.000) 80. Disclosure Tests Including a Finance Segment Three 10 percent significance tests 1.000 $ 540. external or intersegment.000 243.360 62. Segment profit or loss Operating Segment Textiles Paper Goods Finance Total (a) $280 (b) $110 (c) $ 10 $ Segment Profit 280(a) 110(b) 10(c) 400 Percent of Test Amount of $400 70.

7 Separately Reportable Yes Yes Yes Note that the segment assets definition for this company for the Textiles segment does not include the intersegment loan. while the definition of segment assets of the Finance segment for this company includes both loans to external parties and intersegment loans. The 75 percent test: Revenue from unaffiliated customers of separately reportable segments: Textiles Paper Goods Finance Total unaffiliated revenue of separately reportable segments Consolidated revenue Reportable segments' percentage of total revenue ($1. Comprehensive disclosure tests 1. Inc. 2002 .000 1.0% 33.000 Percent of Test Amount of $6.3 16.260 / $1. b.000 50.260) $ 800 400 60 $1. The 10-segment test: The company has only three separately reportable segments.. (continued) Segment assets Operating Segment Textiles Paper Goods Finance Total Segment Assets $3.260 100% 2.E13-11 3.000 $6. McGraw-Hill/Irwin © The McGraw-Hill Companies.000 2.260 $1.

Individual foreign countries exceeding 10% would be listed separately. In this case.165 Sales to Unaffiliates Intersegment Revenue $300 20 $320 $425 90 $515 $370 100 $470 $70 10 $80 $(220) $(220) $1. Disclosure of geographic areas' revenue (in thousands) Geographic Area United States Total Foreign Total Significant country: Mexico Unaffiliated Revenue $ 820 345* $1.165 220 $1. only Mexico would have to be separately reported. Operating segments revenue test (in thousands) Combined Revenue $ 320 515 470 80 $1.385 Eliminations Consolidated $1. Inc. 2002 .9 5. Geographic Area revenue test (in thousands) Unaffiliated Revenue $ 820 245 100 $1.0 8.165 d. In this case.8 Separately Reportable Yes Yes Yes No Operating Segment Ethical Drugs Nonprescription Drugs Generic Drugs Industrial Chemicals Total b.165 $ 245 *Individual foreign countries exceeding 10% of total unaffiliated revenue ($1.6 Separately Reportable Always Yes* No* Geographic Area Domestic Mexico Taiwan Total *Assuming a 10% materiality threshold. Disclosure of operating segments' revenue (in thousands) NonpreEthical scription Generic Drugs Drugs Drugs Other Combined $1. only Mexico would be reported separately.165 Percent of Consolidated Revenue of $1.1% 37.2 33.385 Percent of Combined Revenue of $1. McGraw-Hill/Irwin © The McGraw-Hill Companies.165) would be listed separately.165 70.385 23.4% 21..E13-12 Industry Segment and Geographic Area Revenue Tests a. c.

Revenue should be recognized when realized. Not acceptable. b. c. Costs may be allocated on a reasonable basis. A recovery to original cost may be recorded in a subsequent interim period. Gains are recognized in the period of the sale. Acceptable.E13-13 a. Inc. Acceptable. f. 2002 . The gross profit method may be used for interim reports. Costs may be allocated on a reasonable basis. Acceptable. e.. Acceptable. Different Reporting Methods for Interim Reports [CMA Adapted] Not acceptable. McGraw-Hill/Irwin © The McGraw-Hill Companies. d.

2002 .. Inc.McGraw-Hill/Irwin © The McGraw-Hill Companies.

000 McGraw-Hill/Irwin © The McGraw-Hill Companies.000 130. Inc.000) (290.000) (45.000 $17.000 / $900.500 50.000 340.000 = ($340.000 Operating costs: Traceable costs (245. Combined Intersegment Eliminations Consolidated Segment Reporting Workpaper and Schedules Revenues: Sales to unaffiliated customers 280..600 = ($ 72.000 Intersegment sales 60.000) 90.000 33.000 (617.500 50.000) (20.000) (90.000 400.100 (13.000 75.000 / $900.000) x $45.000) (6.500) (17.000 (707.000 120.000 500.000 72.000 12.000 90.000 120.000 1.000) Allocateda (17.000 900.000 1.900 = ($358.000 400.000 $ 6.000 -0- (20.600) Other items: General corporate expenses Income from continuing operations 78. (1) A B C D Corporate Admin.000 105.000) (20.000 (90.000 1.000 18.000 33.000 -0- 128.000 1.000 / $900.000) (20.000) (45.SOLUTIONS TO PROBLEMS P13-14 a.000 120.600) Assets: Segment General corporate Total assets a 810.000 500.100 (13.080.000) x $45.000 358. 2002 .080.000 810.000 / $900.000) 148.000 75.900) (3.000 810.500 = ($130.000) (82.200.000 130.000 $17.000 60.000) 148.000) (90.000 120.000) x $45.200.000) x $45.000 Total revenue 340.000 105.600) Segment profit (loss) 78.000 $ 3.000) 128.

McGraw-Hill/Irwin © The McGraw-Hill Companies.. 2002 . Inc.

Foreign countries B and C are separately reportable. productive assets for a specific country are material. the revenues and long-lived assets must be disclosed for the domestic operations and.600 x .P13-14 (2) (continued) Segment Profitb Yes Yes Yes No Segment Assetsc Yes No Yes No Segments A B C D Revenuea Yes Yes Yes No a Separately reportable if segment revenue greater than or equal to $90.10).000 ($1. are greater than or equal to $54.000 total operating segment assets x .080. and C) reporting segment profits exceeded the total segment loss ($13.000 x . First.000 ($900.10).160 ($161.000 Yes 37.500 No $540. for all foreign operations.000 x . c.500 No 250. a. b Separately reportable if long-lived assets. which are one-half of total assets. A 10 percent materiality test is used. The absolute value of the total segment profit of $161. Sales greater than or equal to $81.000 (total long-lived assets of $540. c Separately reportable if segment assets greater than or equal to $108.000 (consolidated revenue of $810.10). B.10).000 Yes 52.000 to a single customer would be noted. Country A Domestic B Foreign C Foreign D Foreign Revenuea Yes Yes Yes No Long-Lived Assetsb $200.000 combined revenue x .000 x .600) for the segment reporting a loss (segment D only).600 for the three segments (A.10) . A.000 than or a Separately reportable if country’s revenue to outsiders greater equal to $81. Separately reportable if separate segment profit or loss greater than or equal to $16. a materiality test must be applied to determine if the revenues or long-lived.10). and C are separately reportable. B. b Note that the segment profit (loss) test is based on the larger of the absolute values of the total segment profit or the total segment loss of the segments. in total. Then.23 - . (Consolidated revenue of $810.

000) 1.000) Allocated general corporate expenses (80.000) Segment profit 110.000) (7.000 (1. Segment Reporting Workpaper and Schedules [AICPA Adapted] Calvin.000 155.000) (6.000 125.000) (1.000 750.000) (30.24 - .000 80.000 5.000 -0- (1.766.000) (223.000) 110.000) (160.000 -0- 309.000) (30.000) 97.000 (35.000) (150.000 320.000) (123.000 560.000) (12.000) (13.000 80.000 95.606.000 610.000) (25.000) (75.200.000 140.000 560.000) (106.000) (13.000 Unallocated General corporate expenses Income from continuing operations before taxes Assets: Segment General corporate Total assets (42.000 2.000 60.000) (35.000 160.000 1.000) (106.000) (13.000) (35.000) (200.000) 309.000) (595.000 1.000 160.000 140.000) (450.605.000) (260.040.000) (200.000) (18. Inc.000) 160.000) Selling expenses (160.000 1.000) 97.000) (40.000) Traceable expenses (40.000 1.000) 344.000) (260. 20X1 Corporate Administration Apparel Revenue: Sales to unaffiliated customers Intersegment sales Total sales Operating Segment Building Chemical Furniture Machinery Combined Intersegment Eliminations Consolidated 870.480.000 90.000) (20.000 125.000 .000) Total segment expenses (760.480.950.000 610.000 750.950.000 55.000) (5.000) (65.000 180.000 110.000 (5.110.000 (35.605.000 1.000 140.000 (160.000 -01.000 15.000 125.000 (1.000) (10.000 90.000) (78.000 125.000 870.000 Expenses: Cost of goods sold (480.000 155.P13-15 a.950.000) 344. Segmental Disclosure Workpaper For the Year Ended December 31.

10).10). Comprehensive 75 percent test: $1. reportable b c The Apparel.000 (combined total sales of $2.110.480.000 x . Inc.200 (combined profitable segments' profits of $362.000 x . Separately reportable if segment's assets greater than or equal to $148.000 / $1..000 x . Separately reportable if segment's profit greater than or equal to $36.950.3% Sales to unaffiliated customers of the separately reportable segments Sales to unaffiliated customers for all segments > 75% Irwin/McGraw-Hill © The McGraw-Hill Companies. Building.P13-15 b. Segment Profitb Yes Yes No No Yes Segment Assetsc Yes Yes No No No Revenuea Apparel Building Chemical Furniture Machinery a Yes Yes No No Yes Separately reportable if segment's total sales greater than or equal to $211.10).000 (combined assets of $1.000 = 92.800. and Machinery segments are separately because they pass at least one of the three 10 percent tests. (continued) Separately reportable segments. 1999 .

310.605.000 Consolidated total assets $1.000 (35.000 $560.950.000) $(160. 1999 .000 -0$1.000 $1.480.000 $ 21.000 $750.000 $ 50. Footnote X Information about the Company's Operations in Different Operating Segments Operating Segments Building Machinery $750.000 $110.000 $ 15.P13-15 c.605.000) General corporate expenses (35.000) Consolidated $1.000 $140.000 $1.000 125.000 $170.000 $170. (continued) Calvin.000 Other loss (18.000 $(18.000 Intersegment Eliminations $(160. expenses Income from continuing operations Segment assets General corporate assets Total assets Depreciation expense Capital expenditures Apparel $870.000 $ -0- $ $ 156.000 Other assets 170.000 Other revenues 170.000 140.000 65.950.000 Irwin/McGraw-Hill © The McGraw-Hill Companies. Inc.000 $155.000 $ 20.000 Others $150.000 Reconciliation of Reportable Segment Assets to Consolidated Assets: Total assets of reportable segments $1.000 $ 344.000 $ 60.000) Elimination of intersegment revenues (160.000 20.000 $ 25.940.950.000) 309.000 $870.000 General corporate assets 125.000 $ 30.000 $ $610.000 Total profit and loss for reportable segments $362.000 $320.000 $180.000 Income before taxes $309.000 Reconciliation of Reportable Segment Reconciliation of Reportable Segment Profit and Revenue to Consolidated Revenue Loss to Consolidated Profit or Loss: Total revenue for reportable segments $1. Inc.000) Total consolidated revenues $1..000) Sales to unaffiliated customers Intersegment sales Total revenue Segment profit Unallocated general corp.000 $ 97.

P13-15 (continued) Irwin/McGraw-Hill © The McGraw-Hill Companies. Inc. 1999 ..

.000 = 12.110.110.000 = 42.2% $2.1% $1.000 $460.110.000 = 31.480.2% $1.2% $2.000 Building $750.4% $362.000 = 41.000 = $1.110. Irwin/McGraw-Hill © The McGraw-Hill Companies.5% *The total of the three positive segment incomes ($362.000 = $2.480.000 = $1.000 + $155.4% $80.000 = 41.000 = $110. 1999 .000 $62.000 1.000 = $362.000 2.8% $1.2% $13.000 9.000 = $2.480.d.000) Results of the 10 percent tests to determine if separately reportable: Revenue Apparel Building Chemical Furniture Machinery Yes Yes No No Yes Profit Yes Yes No No Yes Assets Yes Yes No Yes* No * The Furniture segment now becomes a separately reportable segment because its assets are greater than 10% of the total assets.000 5.480.8% $362.8% $5.000 = 35. Schedule showing three ten percent tests with changes in segment assets: Segment Profit (Loss) $110.000 $ 97. Inc.000 5.6% $2.000* Segment Assets $610.4% Furniture $110.8% $362.000 + $97.6% $190.000 Chemical $60.000 = 26.480.000 $140.000 Machinery $320.000 = 3.000 Revenue Apparel $870.000 $155.000 = 15.110.000 = 30.

000 a Computation of Cost of Goods Sold Cost of goods sold as given Add: LIFO inventory liquidation [7.000) = ..$45.50 $285.40 .000 x .000 525.000 240.000 factory rearrangement deferred) Income before taxes Income taxes Net income $850. 20X2 Sales Cost of goods sold Gross profit Operating expense ($230. Inc.000) $570.000 (15.000 140. Income Statement For Three Months Ended June 30.000b $ 72.000) $270.000 b Computation of Income Taxes Income (Loss) Before Taxes Current YearPeriod to-date 100.000 108.000 .000 $525.500 x ($26 .000 $140.$12)] Adjusted cost of goods sold $420.000a $325.45 b.000 40.000 Estimated effective annual tax rate ($270.P13-16 Interim Income Statement a.000 (30. Chris.000 68. Estimate of effective annual tax rate at end of second quarter: Estimated Annual Amounts Income from continuing operations Less: Dividend exclusion Estimated annual taxable income Combined tax rate Estimated annual taxes before credits Less: Business tax credit Estimated income taxes for year $600.000 Estimated Annual Effective Tax Rate .45 Tax (Benefit) Less Reported YearPreviously in this to-date Provided Period 40.000 185.000 100.000 40.000/$600.000 68. 1999 .000 Interim Period 1 2 Irwin/McGraw-Hill © The McGraw-Hill Companies.000 105. Inc.

000 (75.000 (15.000) $600. Inc.325 Irwin/McGraw-Hill © The McGraw-Hill Companies.000) $195..000 .000 = .P13-17 Interim Income Statement a.40 $210.000/$600. Estimated effective annual tax rate as of the end of the second quarter: Estimated Annual Amounts Income from continuing operations Less: Dividends received deduction Estimated taxable income Combined taxable rate Estimated tax before credits Less: Business tax credit Estimated income taxes Estimated effective annual tax rate ($195.000) $525. 1999 .

000) 146. (continued) Malta Corporation Income Statement For Three Months Ended June 30.950b 148.500) 47.000 $ 78.000 $728.950 Period 1 2 c (40.000) $ 80.000 320. Irwin/McGraw-Hill © The McGraw-Hill Companies.000)a $648. 1999 .000 (648.000) $ $ $ 644.000) Estimated ending inventory $ 78..45 .000 Estimated Annual Effective Tax Rate .P13-17 b.000 87.000) 236.000 650.200.000 (80.000 650.54 x $1.200.000 (90.325c Tax (Benefit) Less Reported YearPreviously in This to-date Provided Period (40.050 a Computation of ending inventory Beginning inventory Purchases Goods available Less: Estimated cost of sales (.000 236. 20X1 Sales Cost of goods sold Beginning inventory Purchases Goods available Less: Ending inventory Less: Recovery from LCM Gross profit Operating expense Income before taxes Income taxes Net income $1.000 $728.000 (4.500) See solution to part a.000 b Computation of income taxes Income (Loss) Before Taxes Current YearPeriod to-date (90. Inc.000 556.500) 87.450 (40.

000 .000) $1. Inc. net of taxes of $98. April 1.000 $335. June 30.700..000 (1.000 25.400 182. Burrows Company Income Statement For Quarter Ended June 30.000 $1.000 (67.000) Cost of goods sold for second quarter__adjusted $ 900.000 75.900. 20X5 Cost of goods manufactured Goods available for sale Inventory. Interim Income Statement Burrows Company Schedule of Cost of Goods Sold For Quarter Ended June 30.000 (800.100. 20X5 Cost of goods sold__unadjusted Add: Excess of replacement cost of inventory liquidated over historical cost ($175.000 304.000) $ 525.175.600) $ 122. Burrows Company Schedule of Selling and General Expenses For Quarter Ended June 30.175.000 / 4 quarters) Allocated portion of advertising cost ($50.000.000 c. 1999 .000 $1.$100.P13-18 a.400 $ Irwin/McGraw-Hill © The McGraw-Hill Companies. 20X5 Sales Cost of goods sold Gross profit Selling and general expenses Operating income before taxes Income tax expense__see answer for part (d) Income before extraordinary item Extraordinary gain from early extinguishment of debt. 20X5 Selling and general expenses incurred during the second quarter Add: Estimated property tax expense ($40.000) $ 190. 20X5 Inventory.000 (335.000 10.000 Net income $1.000 1.000 b.000 / 2 quarters) Total selling and general expenses for the second quarter $300.

000) $ 67.32) Income tax expense for the second quarter $150.000 $340. 1999 ..000 x .600 Irwin/McGraw-Hill © The McGraw-Hill Companies. Inc. 20X5 Estimated effective annual tax rate determined at the end of the second quarter Total tax expense for the six months ended June 30. (continued) Burrows Company Schedule Computing Tax Expense For Quarter Ended June 30. 20X5 Operating income before taxes for the first quarter Operating income before taxes for the second quarter Total operating income for the six months ended June 30.P13-18 d.34 $115.600 (48. 20X5 Less: Tax expense determined at the end of the first quarter ($150.000 .000 190.

unless it is impracticable to do so: a. then the revenues for that country shall be separately disclosed. Total foreign sales to unaffiliates Consolidated sales to unaffiliates Total foreign assets Total long-lived assets = $500 $3. Evaluating Foreign Operations Profit or loss for each geographic area: U. Inc.820 290 Allocated costs 100a 12. If assets in an individual foreign country are material.500 sales to unaffiliated / $3. then the amounts of assets held in that specific country shall be disclosed separately.8 Operating profit (loss) $ 680 $ 17. If revenues from external customers generated in an individual country is material. 1999 .S.. Irwin/McGraw-Hill © The McGraw-Hill Companies. b.000 $500 $2.6% = = 18.4) Australia $120 $120 30 4.500 $320 Interarea sales 100 Total revenues $2. Long-lived productive assets (1) located in the entity’s home country of domicile and (2) the total assets located in all foreign countries in which the entity holds assets.4 $(2. Revenues from external customers attributed to (1) the company’s home country of domicile and (2) the total revenue attributed to all foreign countries in which the enterprise generates revenues. New Zealand Sales to unaffiliated $2.P13-19 a.000 total sales to unaffiliated) x $120 common costs to be allocated b.700 = 16.2 Singapore $60 10 $70 70 2.8 $ 85. The company must report the following.5% Revenues and long-lived assets for domestic and total foreign operations must be disclosed.600 $320 Operating expenses 1.2 a $100 = ($2.

7 2.200 280 140 80 $2. Irwin/McGraw-Hill © The McGraw-Hill Companies.0% Geographic Area Domestic New Zealand Singapore Australia Total Separately Reportable Yes Yes No No Geographic Area Domestic New Zealand Singapore Australia Total Assets $2.0% Separately Reportable Yes Yes No No For both of these tests.4 5.000 83.700 Percent of Total Long-lived Assets of $2.2 3. Inc.500 320 60 120 $3.4% 10. (continued) Separately reportable foreign segments: Sales to Unaffiliated Customers $2.000 Percent of Consolidated Revenues of $3. 1999 .0 100.3% 10. using a 10 percent materiality threshold.0 100.. the New Zealand operations is separately reportable as a significant foreign operation.P13-19 c.700 81.0 4.

No restatement of prior years' interims is made. Earnings in each of the first three quarters of 20X2 will be decreased by the net-of-tax effect of $2.P13-20 a. net-oftax.6 28 31 31 12 *The first and second quarters of 20X2 are restated for a change to the lifo inventory method.60) Earnings from Continuing Operations $24.6 27 32 31 11 Quarter Ended 20X2: March 31* June 30* September 30 20X1: March 31 June 30 September 30 December 31 Net Sales $388 406 428 394 416 403 385 Gross Profit $129 131 147 139 151 148 134 Net Earnings $23.6 32. and a resulting decrease of gross profit of $4.6 29.400 ($4.000 for each of the first three quarters of 20X2. Interim Accounting Changes Change to lifo is made effective as of the beginning of the current fiscal year. This change decreased income by $2. Prior interims for the current fiscal period are restated for the change.. 1999 .6 27. between lifo and the prior inventory method is not relevant. The $20. The change to lifo will affect cost of goods sold. Irwin/McGraw-Hill © The McGraw-Hill Companies.400.000 difference on January 1.000 x . Inc.6 29. The effect of the change will be an increase of $4. 20X2.000 to cost of goods sold for each of the first three quarters of 20X2.

and the cumulative effect. Changes in accounting principles are made effective as of the first day of the current fiscal period. will be included in net earnings for the first quarter of 20X2. Cumulative effect as of January 1. The earnings from continuing operations for each of the first three quarters of 20X2 will be restated for the difference between the two depreciation methods. For example.40 tax rate) Cumulative effect..000 x . although pro forma earnings must be presented which include the new accounting method.2 31 26. 1999 . 20X2. the restated earnings from continuing operations would be increased for the $600 decrease in depreciation. the cumulative effect is computed as of January 1. In Quarter II. in Quarter I. Irwin/McGraw-Hill © The McGraw-Hill Companies.800 ($3.6 33. The accelerated method of depreciation will be used to determine the earnings from continuing operations for each of the first three quarters of 20X2.60). For Square Q Company.8 Pro Forma 27 21 32 27. net-of-tax ($1. net-of-tax.6 33.8 12 9 20X1: March 31 June 30 September 30 December 31 394 416 403 385 139 151 148 134 *Restated for a change in accounting principle from the straight-line method of depreciation to the accelerated method.000 decrease from the cumulative effect of the accounting change.P13-20 (continued) b. Net earnings for the first quarter of 20X2 includes the $18. 20X2: Accumulated straight line depreciation Accumulated accelerated depreciation Difference Tax ($30 x .8 11 8 Quarter Ended 20X2: March 31* June 30* September 30 Net Sales $388 406 428 Gross Profit $133 135 151 Net Earnings $ 8 35. there is no difference in depreciation. net-of-tax. net-of-tax $160 (4 x $40) 190 ($50+$48+$47+$45) $ 30 (12) $ 18 This cumulative effect will result in a decrease of net earnings of $18 due to the larger amount of depreciation that would have been recognized using the accumulated depreciation method. Inc.60).2 31 26.8 Pro Forma 28 22 31 26. Earnings from Continuing Operations $27 30. The prior years' interims are not restated. Quarter III would be increased by $1.000 x . 20X2: January 1. Pro forma earnings are presented for 20X1.

1999 . The impacts on sales and gross profits for each of the quarters are as follows: Completed Contract Gross Sales Profit $ 80 0 100 $20 0 50 Percentage-ofCompletion Gross Sales Profit $60 55 70 60 40 50 50 $30 30 40 40 20 30 30 Effect of Change Gross Sales Profit $(20) 55 (30) 60 (110) 50 (10) $10 30 (10) 40 (80) 30 (10) Quarter Ended 20X2: March 31 June 30 September 30 20X1: March 31 June 30 September 30 December 31 150 0 60 100 0 40 Parentheses around the amount in the Effect of Change column indicates a reduction of the reported amount. is changed to a loss of $16. 20X1. Introducing this amount of volatility into an income stream may be a reason that a firm may not want to make an accounting change. ending March 31. Inc.P13-20 (continued) c..60). For example. Change in method of accounting for long-term accounting contracts requires the retroactive restatement of all prior interims. the effect of the change on earnings for the first quarter of 20X2. The effect on earnings from continuing operations will be the net-of-tax effect of the effect of the change on the gross profit. ending June 30. Irwin/McGraw-Hill © The McGraw-Hill Companies. Of special note is that the previously reported continuing operations earnings of $32 in the second quarter of 20X1. will be $6 ($10 x . Earnings Net Gross from Continuing Net Quarter Ended Sales Profit Operations Earnings 20X2:* March 31 $368 $143 $33 $32 June 30 461 165 48 53 September 30 398 141 26 26 20X1:* March 31 454 179 51 52 June 30 306 71 (16)Loss (17)Loss September 30 453 178 49 49 December 31 375 124 5 6 *All quarters have been restated for the change in accounting for longterm contracts. Note that the revenue and income streams are quite volatile after the change in accounting method. including those of previous years.

300) (405.000 Ending inventory (340.000 (a) (b) (c) (d) Quarter Ended June 30 $ --- Total $200.800 30.000) Cost of goods sold $1.105.P13-21 a.500) Selling and general expenses not including depreciation and warranty expenses $153.500 $1.000 x .656 Cumulative effect of changing from the sum-of-the-years' digits to the straight-line method.000 $2.000 Cost of goods sold (1. Interim Income Statement Three Months Six Months Ended June 30.500 40.000 Irwin/McGraw-Hill © The McGraw-Hill Companies.500 30.360 --32.355.000 (b) Selling and general expenses: Quarter Ended March 31 Selling and general expenses reported $200. 20X5 Ended June 30.000) $2.540.000 Selling and general expenses (206.200 Income tax expense (58.000 per year / 4 quarters 5. 20X5 Sales $1.080.500 11.000 Less: Depreciation expense (6. 1999 .540.000) Gross profit $ 460.296 Supporting schedules: (a) Cost of goods sold: Quarter Ended June 30 Beginning inventory $ 320. net of taxes of $15.000) (40.700 $ 469.02 Depreciation expense: $220.100.015.350.000 $323.544) Income before cumulative effect of change in accounting principle $ 139.000 $ 875.000) (105.500 Add: Warranty expense: $1.000 (340.000) Income before taxes and cumulative effect $ 198.000 / 10 years = $22.700 $ 364.800 5.000 x .640 Net income $ 139.906 $ 280.080.015.800) Operating income $ 253.000) (2. Interim Income Statement for First Two Quarters Burnell Inc.000 Cost of goods manufactured 1.03 40.000 (6.000 Total cost of goods available $1.200 Interest expense (55.000 2.. Inc.906 $ 247.000 $2.000) Warranty expense (40.500 Six Months Ended June 30 $ 250.890.500) 170.794) (116.420.

Inc.500 $206.300 $405.Total expenses $199..800 Irwin/McGraw-Hill © The McGraw-Hill Companies. 1999 .

$20.$20. 20X5 (depreciation expense for 2091 through 2094) if the straight-line method had been used: 4 years ____________ = 10 years ($240.200 .000 $1.640 b.100. net of taxes $ 48.000) x (88. Cost of goods sold for the second quarter if the market declines were considered to be permanent: Beginning inventory..085.000 Accumulated depreciation at January 1. 20X5 Income tax expense for the second quarter ended June 30.P13-21 (continued) (c) Income tax expense: Income before tax for the six months ended June 30.000) $1.000) Cumulative effect.000) Cumulative effect before income taxes Income taxes (. 20X5 Estimated annual effective rate determined at June 30 Income tax expense for six months ended June 30. April 1. Inc.000 .000 Irwin/McGraw-Hill © The McGraw-Hill Companies.000) x = $136.000 (15.32 x $48. 1999 . 20X5 (depreciation expense for 2091 through 2094) using the sum-of-the-years' digits method of depreciation: 10 + 9 + 8 + 7 ________________ 55 ($240.750) $ 58.415.794 (d) Cumulative effect of changing accounting principles: Accumulated depreciation at January 1.32 $116. 20X5 Cost of goods manufactured Cost of goods available Less ending inventory.000 1.360) $ 32. June 30. 20X5 Less: Income tax expense for the three months ended March 31.000 .000 (330. 20X5 Cost of goods sold $ 315. 20X5 $364.544 (57.

1999 .8% Reportable Segment No Yes No No Yes Segment Car Rental Aerospace Communications Health/Fitness Heavy Equipment Total Multiplex Inc.1% 19.2% 5.7% 17.6% 8.P13-22 a.9% Reportable Segment Yes No Yes Yes Yes Determination of the profit of each segment (in millions): Car Rental $39 Communications $60 Health/ Fitness $50 Heavy Equipment $275 (177) (29) (23) (37) Revenue Cost of goods sold Selling expenses Other traceable expenses Allocation of common costs Operating profit Aerospace $204 (141) (16) (42) (4) (8) (11) (5) (10) (2) $17 $ (7) 6 (2) $18 (2) $20 (7) $ 44 Total profits amount to $105.. 20X5 (in millions) Segment Revenue $ 39 204 60 50 275 $628 Percent of Combined Revenue of $628 Million 6.0% 43. 20X5 (in millions) Segment Car Rental Aerospace Communications Health/Fitness Heavy Equipment Total Segment Profit(loss) $ 17 6 18 20 44 $105 Percent of Test Amount of $105 million 16.000 ($17 + $6 + $18 + $20 + $44).5% 9.0% 41. Segment Disclosures in Financial Statements Multiplex Inc. P13-22 (continued) Multiplex Inc. Schedule for 10% Revenue Test For the Year Ended December 31.000. Schedule for Segment Assets Test For the Year Ended December 31. Inc. 20X5 Irwin/McGraw-Hill © The McGraw-Hill Companies. Schedule for the 10% Segment Profit or Loss Test For the Year Ended December 31.2% 32.

7% 14. Irwin/McGraw-Hill © The McGraw-Hill Companies. 20X5 Revenue Test Profit Test Assets Test No Yes No Yes No Yes No Yes Yes No Yes Yes Yes Yes Yes Segment Yes Yes Yes Yes Yes b. Inc. Since all of Multiplex's operating segments are reportable.8% 16. the 75% revenue test is satisfied. 1999 .3% Segment Car Rental Aerospace Communications Health/Fitness Heavy Equipment Total Segment Assets $ 20 107 70 80 195 $472 Reportable Segment No Yes Yes Yes Yes Segment Car Rental Aerospace Communications Health/Fitness Heavy Equipment Multiplex Inc. Schedule of Reportable Segments For the Year Ended December 31..2% 22.(in millions) Percent of Test Amount of $472 million 4.9% 41. The reportable segments account for 100% of the sales to unaffiliated customers.

. plant and equipment) Unallocated corporate assets Consolidated total $472 (15) ( 7) 25 $475 Irwin/McGraw-Hill © The McGraw-Hill Companies. Information About Multiplex's Operations in Different Industry Segments: Multiplex Operations Industry Segments (in millions) Car Rental Aerospace Communications Health/ Fitness Heavy Equip.P13-22 (continued) c. 1999 . Item Sales to unaffiliated customers Intersegment sales Total revenue Depreciation Segment profit Segment assets Expenditures for segment assets Combined $34 5 $39 $ 4 17 20 3 $204 $204 $ 15 6 107 30 $60 $60 $ 4 18 70 $50 $50 $ 5 20 80 15 $250 25 $275 $ 25 44 195 40 $598 30 $628 $ 53 105 472 88 Reconciliation of Reportable Segment Profit and Loss to Consolidated Profit and Loss Total profit or loss for reportable segments Elimination of unrealized intersegment profits Other corporate expenses (unallocated) Income before income taxes and extraordinary items $105 (7) 33 $ 65 Reconciliation of Reportable Segment Revenues to Consolidated Revenues Total revenues for reportable segments Elimination of intersegment revenues Total consolidated revenues $628 (30) $598 Reconciliation of Reportable Segment Assets to Consolidated Assets Total assets for reportable segments Intercompany receivable Unrealized company profit (a reduction of the carrying amount of property. Inc.

000. on a country basis.000.000.000.000.000 300. productive assets of foreign operations total $370. The determination of which foreign operations. productive assets in total for domestic and all foreign operations.000 $856.000. Revenues: Sales to unaffiliated customers from operations in France.000 = 49. Inc. Mexico.8% Long-lived assets: Long-lived.P13-23 Reporting Operations in Different Industries a. the company would disclose total revenues and total long-lived assets for the domestic operations and for total foreign operations. The 10% revenue test is shown below: Watson Inc. are separately reportable depends upon two tests to determine which individual foreign operations must be separately disclosed.000 Geographic Area Domestic France Mexico Japan Total Percent of Consolidated Revenue of $856.000.000.000. Then.000.3% b. 1999 . Irwin/McGraw-Hill © The McGraw-Hill Companies.000 / $856. Watson uses a 10 percent materiality threshold for these tests.000 50.2% 35. 20X5 Sales to Unaffiliated Customers $430.000. Therefore. $370. Revenue Test Applied to Individual Foreign Operations For the Year Ended December 31. $426. First. FASB 131 requires companies to disclose revenues and long-lived. if revenues or long-lived assets are material in any single country.000.5% Separately Reportable Yes Yes No Yes The revenue test indicates that the French and Japanese operations should be separately reported.000 90.000 = 49.000.2% 10.. and Japan total $426.0% 4. that disclosure must be made on a country basis.000 / $750.000.000 36.

productive assets test is shown below: Watson Inc.000 46.000.5% 31. Assets Test Applied to Individual Foreign Operations For the Year Ended December 31. Watson Inc.7% 16..000 Separately Reportable Yes Yes No Yes The company will disclose the long-lived assets in France and Japan.000.000.P13-23 (continued) The long-lived. 20X5 Percent of Total Long-Lived Assets of $505. Geographic Information (In $millions) Revenues $430 300 90 36 $856 Long-Lived Assets $235 160 81 29 $505 United States France Japan Other Irwin/McGraw-Hill © The McGraw-Hill Companies.000 $505.000.0% Geographic Area Domestic France Mexico Japan Consolidated Assets $235. Inc.000 29.000 160. 1999 .000 81.000.7% 5.000.

7. 5. 11.P13-24 1. Matching Key Terms L R D O A F I K M C N H Q S Irwin/McGraw-Hill © The McGraw-Hill Companies. 14. 10. 6. 2. 8. 4. 1999 . 9.. 3. Inc. 13. 12.

(Page Intentionally Left Blank) Irwin/McGraw-Hill © The McGraw-Hill Companies.. 1999 . Inc.

1999 . Inc..Irwin/McGraw-Hill © The McGraw-Hill Companies.

. Inc.Irwin/McGraw-Hill © The McGraw-Hill Companies. 1999 .