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Chapter 13 - Segment and Interim Reporting

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.

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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 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.
b. 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.
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.

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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 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 benefited. 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 annual 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 annual 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 A change in accounting principle made in an interim period is reported using


the retrospective application process. The balance sheet for the earliest period
presented (usually an annual period) is adjusted for the cumulative amount of the
change as of the beginning of that year. Then, all subsequent annual and interim
financial statements shall be adjusted to the newly adopted accounting principle. In
the example of an inventory change, all the financial statements presented must be
adjusted to the new method, the average cost method. The balance sheet for the
earliest period presented must include the cumulative effect as of the change
computed as of the beginning of that first period presented.

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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 characteristics 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.

2. A segment shall be regarded as significant and identified as a 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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C13-3 Segment Disclosures in the Financial Statements [CMA Adapted]

a. A subdivision of an entity is a reportable segment if one of the following tests is


met:

1. Revenue, both unaffiliated and intersegment revenue, is ten percent or more of


total revenue, which includes intersegment revenue. For each of Bennett's
segments, divide the sum of the unaffiliated sales and intersegment sales by
total company sales of $63,000. If the result is ten percent or more, the
revenue test is met for that specific segment.

2. 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, in
absolute amounts, of the segments that did incur a loss. For each segment,
divide the absolute value of the profit or loss by the sum of the segment profits
of $6,200. If the result is ten percent or more, the segment profit or loss test is
met for that specific segment.

3. Assets are ten percent or more of total assets. For each segment, divide the
value of the assets by total assets of $100,000. If the result is ten percent or
more, the assets test is met for that specific segment.

The calculations for the segments of Bennett Inc. yield results that show that all
segments are reportable with the exception of Security Systems, which does not
meet any of the tests. See the results of all the tests in the table below.

Bennett Inc.
Results of Required Tests for Determining Segment Reporting
For the Year Ended December 31, 20X5

Power Fastening Household Plumbing Security


Tools Systems Products Products Systems
Revenue .67 .16 .08 .06 .03
Profit .73 .16 .10 .11 .02
Assets .50 .23 .17 .06 .04
Reportable Yes Yes Yes Yes No

b. For the reportable segments of Bennett Inc. to represent a substantial portion of


total operations, 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. Since the sales to unaffiliated customers of Bennett's reportable segments
are $44,300 and represent approximately 96 percent of the company's total sales
($44,300 / $46,300), this criterion would be met.

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C13-4 Determining Industry and Geographic Segments

a. This is an actual case adapted from experiences with a large, publicly held U.S.
company. The U.S. company's management was reluctant to disclose information
about the Canadian operation's profitability because of the desire to maintain its
economic competitiveness, and because of fear that Canadian authorities might want
to increase regulation of non-Canadian owned companies operating in Canada.

b. Under FASB 131, the U.S. company must present its segmental disclosures
based on the definition of operating segments as used for internal decision making.
Therefore, if the management of the company felt that the two product lines were
sufficiently comparable, management could aggregate the two product lines in the
same operating segment for internal decision-making purposes. Then, because the
two product lines were in one operating segment for internal decision-making
purposes, they would be considered one operating segment for external disclosure
purposes under FASB 131. However, FASB 131 also requires separate disclosure of
revenues by product line. The company could still be required to disclose revenue
information about the pasta product line.

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, one-time events
that are not expected to continue. Thus, if a segment becomes reportable in a single
period because of some significant one-time events, the company may choose not to
include it as a separately reportable segment. However, if in the next year, the pasta
business continues to meet the separately reportable segment tests, then the
company’s management would not be able to use this argument.

c. FASB 131 requires separate disclosure of total revenues from external customers
attributed to the domestic operations and the total attributed to all foreign operations.
In addition, disclosure is required of the total of long-lived assets located in the
country of the domestic operations and the total long-lived assets in all foreign
countries. If the revenues or the long-lived assets in any individual country are
material, then separate disclosure of the material revenues or significant amount of
long-lived assets must be made for those specific countries. FASB 131 did not
specifically state a measure of materiality to be used in assessing foreign operations.
Management does have the flexibility to determine the basis of assigning revenues to
specific countries. For example, in this case, management may argue that the
revenues should be based on the point-of-sale to the eventual consumer. Thus, sales
of the pasta products in the U.S. would be assignable to the U.S. domestic market
even though the product may have been manufactured in Canada.

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C13-5 Segment Reporting

a. A great amount of information can be found on a company’s homepage ranging


from financial information to product information and company profiles. The internet
address for many companies includes their company name. Your students may
simply use a web browser to do a search for a specific company.

b. EDGAR is a comprehensive database of SEC filings for all publicly held firms. The
URL is http://www.sec.gov and EDGAR can be accessed from there. All SEC filings
for publicly held firms are available in this database and the filings can be easily
printed off for further use, if required.

C13-6 Interim Reporting

a & b. Internet URL: http://www.sec.gov/

The above Internet address provides access to the SEC’s homepage that has a link
to the EDGAR database. From this page, the user is able to select "Search for
Company Fillings” and then on the Search the EDGAR Database page that comes
up, to select “Companies & Other Filers” under the General Purpose Searches
heading. This link takes you to EDGAR Company Search page at which you will enter
the Company name. After clicking on the “Find Companies” button at the bottom of
the screen, students will be taken to a listing of the companies with that name, and
can select their specific company which will then take them to the listing of all SEC
filings for that company and they can then quickly scroll down to find a Form 10-Q.

In comparison to the Form 10-K, several differences in Form 10-Q are noted. The
interim financial statements and footnotes are entirely unaudited. As the interim
financial statements are unaudited, no report from the independent public
accountants is provided in the Form 10-Q.

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C13-7 Defining Segments for Disclosure

MEMO

To: Randy Rivera, CFO, Stanford Corporation

From:

Re: Segment Disclosures

For the current annual reporting period, Stanford Corporation has identified four operating
segments that meet the quantitative thresholds to be considered reportable segments
under FASB Statement No. 131 (FASB 131). Neither the cereals segment nor the sports
beverage segment meets any of the three quantitative thresholds in the current period.
[FASB 131, Par. 18]

However, the FASB 131 quantitative thresholds are intended to insure that information
about significant business segments is included in the disclosures, not to limit the
information that can be provided.

The cereals segment, which was disclosed as a reportable segment last year, can
continue to be reported this year if its disclosure provides significant information for the
users of the financial statements, even though the segment does not meet the specific
criteria for separate disclosure specified in paragraph 22 of FASB 131.

In addition, the segment disclosure standard allows companies to designate additional


operating segments as reportable segments. Management may decide to provide
separate disclosure of segment information for other segments that management feels
that the disclosure would be of information value to the users of the financial statements.

Finally, paragraph 24 of FASB 131 addresses the possibility that identification of too
many reportable segments might result in overly detailed segment information. As a
general guideline, the standard suggests that a reasonable limit of 10 segments should
be used and smaller, somewhat comparable segments can then be combined for
purposes of the footnote disclosure.

As a result of my research, I conclude that it would be acceptable for Stanford to report


information about six segments, including the cereals and sports beverage segments.
Disclosure of information for six segments does not approach the practical limit on the
number of segments suggested in FASB 131. The continuing significance of the cereals
segment and the developing significance of the sports beverage segment make their
inclusion appropriate even though these segments do not meet the FASB 131
quantitative thresholds in the current year.

Primary references
FASB 131, Par. 22
FASB 135, Par. 4 (x) [replaces a section of FAS 131, Par. 18]

Other references
FASB 131, Par. 24

Query Used
reportable segment*

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C13-8 Income Tax Provision in Interim Periods

MEMO

To: Andrea Meyers, Controller's Department, Vanderbilt Company

From:

Re: Income Tax Provision in Interim Periods

In computing the income tax provision for interim periods, APB 28 states that the
company should make its best estimate of the effective tax rate expected to be applicable
for the year. [APB 28, Para. 19] This estimate should reflect all expected tax credits, and
other tax rates, such as foreign taxes. Therefore, anticipated tax credits available to
Vanderbilt should be included in the computation of the expected effective annual tax
rate.

However, the first quarter calculation of this tax rate cannot include the anticipated
energy tax credit benefits because the tax law providing the energy tax credit has not yet
been enacted into law.

Vanderbilt's first quarter estimate of the effective annual tax rate should not include the
expected tax benefits of the energy tax credit. Changes in the tax rate are to be
recognized as changes in estimate, according to APB 28. If the legislation is enacted as
expected, the effect of the tax credit should be factored into the estimate of the effective
annual tax rate made at the end of the third quarter, which would reduce the income tax
provision for the third quarter of 20X5.

Primary references
APB 28, Par. 19
FAS 109, Par. 288(h) [replaces a sentence of APB 28, Par. 20]

Other references
APB 28, Par. 26

Query Used
tax rate* interim

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C13-9 Questions about Interim Reporting

1. In their third-quarter 10-Q, a company would have the following four income
statements for the respective reporting periods:
a. An income statement for the third quarter and a comparative income statement for
the third quarter of the prior year.
b. An income statement for the cumulative first three quarters of the current year and
a comparative cumulative income statement for the first three quarters of the
prior year.

2. FASB 154 requires that a change in depreciation method be accounted for as a


change in accounting estimate effected by a change in accounting principle. The current
and prospective application is used and prior financial statements are not restated. Thus,
the third quarter and subsequent periods would report with the new depreciation method.

3. The company would report a condensed balance sheet as of the end of the third
quarter and a condensed balance sheet as of the end of the prior fiscal year. However, a
company should also provide a comparative, condensed balance sheet as of the end of
the third quarter of the prior fiscal year if it is necessary for understanding the seasonal
fluctuations on the company’s financial condition.

4. No, interim financial statements do not need to be audited. However, some


companies choose to have their interims audited. Summary amounts from the interim
reports are included in the annual financial report and are subject to audit review at that
time.

5. FASB 131 requires segment disclosures in each interim report. However, the level of
detail of information required in the interim report is less than that required in the annual
report.

6. Publicly owned companies classified as accelerated filers must file their 10-Q within
35 days after the end of each of their first three quarters. Companies not meeting the
criteria of accelerated files must file within 45 days after the end of each of their first three
quarters.

7. The methods of computing revenues for interim reporting should be the same as
those used for the annual financial statements. The reason for this is so that financial
statement users may properly determine the revenue patterns during the year. However,
if a company makes a change in accounting principle that affects the computation of its
revenues, the company must retroactively apply the new accounting principle to all prior
interims.

8. No, a company is not required to take a physical inventory at the end of each quarter
although a physical inventory is required as part of the annual audit procedures. A
company usually estimates ending inventory for each quarter based on beginning
inventory plus purchases, less the cost of sales. The cost of sales is estimated using the
normal mark-up percentages from cost to retail.

9. Many companies allocate costs incurred in a quarter that benefit the entire year. A
common example of this are the costs associated with retooling efforts during the short
period the company is shut down each year for retooling to take place. Several allocation
methods are allowed such as allocating a fourth of the retooling cost to each quarter or

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relating the retooling cost to proportional sales revenue during the year. The key point to
selecting an allocation method is that the method must be rational and relate to the
benefits received from the cost. .

C13-9 (continued)

10. This is a change in accounting principle for which FASB 154 requires a
retrospective application. All prior periods, including prior interims, are restated to the
new accounting principle (percentage-of-completion) for the direct effects of the change.
This presumes that the company is able to determine the effects of the change on
previous interim periods. Otherwise the company must wait until the first day of the next
fiscal year to make the change.

11. This is a change in estimate and is treated currently and prospectively. Prior interims
are not restated for this change in estimates. The change in estimate would be made
effective as of the first day of the interim period in which the change is made.

SOLUTIONS TO EXERCISES

E13-1 Reportable Segments

a. Segment Revenuea Profit (loss)b Assetsc

Electronics No No No
Bicycles Yes Yes Yes
Sporting Goods No No No
Home Appliances Yes Yes Yes
Gas and Oil Yes Yes Yes
Glassware No Yes No
Hardware Yes Yes Yes
a
Segment revenue greater than $77,500 ($775,000 x .10)
b
Segment profit or loss greater than $10,370
($103,700 total profit, excluding loss segments x .10)
c
Segment assets greater than $118,500 ($1,185,000 x .10)

All segments but Electronics and Sporting Goods are separately reportable.

b. The 75 percent test is applied to revenue from unaffiliated customers.

Revenue from unaffiliated customers


of reportable segments = $655,000 = 87.3%
Total revenue from unaffiliated customers $750,000

Yes, the 75 percent test is met.

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E13-2 Multiple-Choice Questions on Segment Reporting [AICPA Adapted]

1. b Sales $ 750,000
Traceable operating expenses (325,000)
Indirect operating expenses
(3/4 x $120,000) (90,000)
Operating profit $ 335,000

2. d

3. a 20X6
Segment 3 Total
Sales ($1,800,000 x .60) $1,080,000 $1,800,000
Traceable costs (600,000) (1,200,000)
Income before common costs $ 480,000 $ 600,000
Cost allocated
[($480,000 / $600,000) x $350,000] (280,000)
Operating profit $ 200,000

4. c
Segment B Total
Sales $ 300,000 $ 900,000
Traceable costs (240,000) (600,000)
Income before allocable costs $ 60,000 $ 300,000
Cost allocated
[($60,000 / $300,000) x $150,000] (30,000)
Operating profit $ 30,000

5. c

6. a

Sales $ 400,000
Traceable costs $ 150,000
Allocated costs
[($400,000 / $1,000,000) x $500,000] 200,000 (350,000)
Operating profit $ 50,000

7. b $260,000 = [($2,000,000 + $600,000) x .10]

8. d [.10 x ($1,200,000 + $180,000 + $60,000)]

9. c

10. c

11. d

12. a

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E13-3 Multiple-Choice Questions on Interim Reporting [AICPA Adapted]

1. d

2. c

3. a

4. b

5. c

6. a

7. a

8. b $145,000 = [($180,000/4) + ($300,000/3)]

9. b

10. b

11. b According to APB 28, gains and losses arising from events such as
discontinued operations, unusual or infrequent events, and extraordinary items
should be reported in the interim period in which the event occurs. On the other
hand, expenses incurred in one interim period that benefit other interim periods
should be allocated to the interim periods benefited. In the case of Park Corp.,
the $40,000 of property taxes should be allocated to all interim periods. For the
six months ended June 30, 20X5, Park should recognize 50% of the $40,000,
or $20,000, as an expense. However, the entire $100,000 net loss from the
disposal of the business segment should be recognized as a loss for the six
months ended June 30, 20X5. Therefore, a total of $120,000 should be
included in the determination of Park's net income for the six months ended
June 30, 20X5.

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E13-4 Temporary LIFO Liquidation

Case a: Partial replacement of LIFO base by year-end.


(1) Cost of Goods Sold 30,420
Inventory 22,320
Excess of Replacement Cost over LIFO
Cost of Inventory Liquidation 8,100
Sold 1,240 units of LIFO base of which 900 units
are expected to be replaced:
$22,320 = 1,240 units x $18 LIFO cost
$8,100 = 900 units x $9 ($27 expected
replacement cost less $18 LIFO cost)

(2) The account, Excess of Replacement Cost over LIFO Cost of Inventory
Liquidation, is often reported on the quarterly balance sheets as a current
liability. Some companies report this valuation account as a reduction of
inventory. The account is not reported on the annual balance sheet because the
LIFO inventory at year-end is based on the actual units remaining in inventory at
year end.

(3) Inventory 16,200


Excess of Replacement Cost over LIFO
Cost of Inventory Liquidation 8,100
Cost of Goods Sold 3,600
Accounts Payable 27,900
Replace 900 units of LIFO base:
$16,200 = 900 units x $18 LIFO cost
$3,600 = 900 units x $4 difference between
$31 actual and $27 estimated
replacement cost
$27,900 = 900 units x $31 actual cost of
replacement

Case b: No replacement of LIFO base by year-end.


(1) Cost of Goods Sold 25,020
Inventory 22,320
Excess of Replacement Cost over LIFO
Cost of Inventory Liquidation 2,700
Sold 1,240 units of LIFO base of which 300 units
are expected to be replaced:
$22,320 = 1,240 units x $18 LIFO cost
$2,700 = 300 units x $9 ($27 expected
replacement cost less $18 LIFO cost)

(2) December 31 entry:


Excess of Replacement Cost over LIFO
Cost of Inventory Liquidation 2,700
Cost of Goods Sold 2,700
Eliminate remaining balance in LIFO valuation
account because company did not replace LIFO
inventory sold in July.

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Chapter 13 - Segment and Interim Reporting

E13-5 Inventory Write-Down and Recovery

Case a: Market reductions assumed permanent.

Cost of Inventory Adjustment = Cost of


Quarter Units Sold +/- to Market Goods Sold

I $340,000 + $8,500 = $348,500


(400 x $850) (1,700 x $5)
$850 is unit write down to $840
cost from 20X0

II $253,500 - $7,000 = 246,500


(300 x $845) (1,400 x $5)
recovery to $850
original cost

III $85,000 + $26,000 = 111,000


(100 x $850) (1,300 x $20)
write down to $830

IV $332,000 - $9,000 = 323,000


(400 x $830) (900 x $10)
recovery to $840
Total $1,029,000

Annual basis:
$1,020,000 + $9,000 = $1,029,000
(1,200 x $850) (900 x $10)
write down from
$850 to $840

Note that $840 effectively became the new unit cost basis for the inventory items as of
December 31, 20X1. If further inventory market declines are suffered in the early
quarters during 20X2, recoveries will be permitted only to the extent of $840.

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E13-5 (continued)

Case b: Market reductions assumed temporary and price will recover by year-end.
If market reductions are assumed to be temporary, the company is not required to
recognize in its interim financial statements the effects of the seasonal changes in prices
(and few companies would under the assumption of temporary reductions recovering by
year-end). However, the company would be required to revalue its year-end inventory to
lower-of-cost-or-market for its annual financial statements.

Cost of Inventory Adjustment = Cost of


Quarter Units Sold +/- to Market Goods Sold

I $340,000 = $340,000
(400 x $850)
$850 is unit
cost from 20X0

II $255,000 = 255,000
(300 x $850)

III $85,000 = 85,000


(100 x $850)

IV $340,000 + $9,000 = 349,000


(400 x $850) (900 x $10)
write down from
Total $850 to $840 $1,029,000

Annual basis:
$1,020,000 + $9,000 = $1,029,000
(1,200 x $850) (900 x $10)
write down from
$850 to $840

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Chapter 13 - Segment and Interim Reporting

E13-6 Multiple-Choice Questions on Income Taxes at Interim Dates [AICPA


Adapted]

1. a

2. b $170,000 x .45 = $ 76,500


$130,000 x .40 = (52,000)
Third quarter $ 24,500

3. c Net operating loss credit ($100,000 x .40) $ 40,000


Other tax credit 10,000
Total credits $ 50,000
Estimated annual operating loss ÷100,000
Tax benefit rate ($50,000 / $100,000) .50
Operating loss in first quarter x$20,000
Tax benefit in first quarter $ 10,000

4. c

5. c .25 X $200,000 = $50,000.

6. b Deferred taxes are computed only for temporary


differences. The other items are permanent differences.

E13-7 Significant Foreign Operations

Percent of
Sales to Consolidated
Unaffiliated Revenue of Separately
Geographic Area Customers $793,000 Reportable
U.S. $364,000 45.9% Yes
Britain 252,000 31.8 Yes
Brazil 72,000 9.1 No
Israel 58,000 7.3 No
Australia 47,000 5.9 No
Consolidated Revenue $793,000

Note that the country-based revenue test is based on sales to unaffiliated


customers. All countries having material sales to unaffiliated customers of $79,300
($793,000 x .10) or more must be separately reported.
Percent of
Total Long-
Long-Lived Lived Assets Separately
Geographic Area Assets of $1,182,000 Reportable
U.S. $ 509,000 43.1% Yes
Britain 439,000 37.1 Yes
Brazil 93,000 7.9 No
Israel 66,000 5.6 No
Australia 75,000 6.3 No
Total Assets $1,182,000

All geographic areas reporting long-lived assets of $118,200 ($1,182,000 x .10) or


more must be separately reported.

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Chapter 13 - Segment and Interim Reporting

E13-8 Major Customers

Major customers are those to whom sales equal or exceed $4,300,000


($43,000,000 x .10). Government units under common control are classified as a
single customer. However, counties are not under the common control of the
state government. Therefore, Cook County is a separate customer from the
State of Illinois.

Service contracts $6,100,000


($3,900,000 + $2,200,000 under common control)
Computer software $4,650,000
Computer hardware $5,400,000

E13-9 Estimated Annual Tax Rate

a. Estimated
Annual
Amounts

Income from continuing operations $1,200,000


Adjustment for permanent differences:
Addback: Premiums for life insurance $ 12,000
Less: Dividends exclusion (70,000)
Tax-exempt income to be received (20,000) (78,000)
Estimated annual taxable income from
continuing operations $1,122,000
Combined tax rate x .40
Estimated annual taxes before credits $ 448,000
Deduct expected business tax credit (40,000)
Estimated income taxes for year $ 408,800

Estimated effective annual tax rate =


$408,800 / $1,200,000 = .34 (rounded)
(Note that the estimated income taxes for the
year include both federal and state income
taxes.)

b. Income Tax Expense 68,000


Income Tax Payable 68,000
Record first-quarter tax provision:
$170,000 total pre-tax earnings
+ 30,000 addback extraordinary loss that is
reported separately with its own
income tax effect
$200,000 first-quarter income from continuing
operations
x .34 effective annual tax rate
$ 68,000 first quarter tax provision for
continuing operations
(Note that the problem requires only the tax provision for the continuing operations.
The tax effect of the extraordinary loss would be recognized separately.)

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Chapter 13 - Segment and Interim Reporting

E13-10 Operating Loss Tax Benefits

Income (Losses) Estimated Tax (Benefit)


Before Taxes Effective Less Reported
Year- Annual Year- Previously In
Period Period to-Date Tax Rate to-Date (a) Provided Period

1 $(100,000) $(100,000) 40% $(40,000) -0- $ (40,000)


2 80,000 (20,000) 40% (8,000) $(40,000) 32,000
3 160,000 140,000 45% 63,000 (8,000) 71,000
4 400,000 540,000 45% 243,000 63,000 180,000
Total $ 540,000 $243,000

(a) Year-to-date: Year-to-date income (losses) x Updated estimated effective annual


tax rate

E13-11 Industry Segment and Geographic Area Revenue Tests

a. Operating segments revenue test (in thousands)

Combined Percent of Combined Separately


Operating Segment Revenue Revenue of $1,385 Reportable

Ethical Drugs $ 320 23.1% Yes


Nonprescription Drugs 515 37.2 Yes
Generic Drugs 470 33.9 Yes
Industrial Chemicals 80 5.8 No
Total $1,385

b. Geographic Area revenue test (in thousands)

Unaffiliated Percent of Consolidated Separately


Geographic Area Revenue Revenue of $1,165 Reportable

Domestic $ 820 70.4% Always


Mexico 245 21.0 Yes*
Taiwan 100 8.6 No*
Total $1,165

*Assuming a 10% materiality threshold. Individual foreign countries exceeding 10%


would be listed separately. In this case, only Mexico would have to be separately
reported.

c. Disclosure of operating segments' revenue (in thousands)

Nonpre-
Ethical scription Generic Com- Elimina- Consol-
Drugs Drugs Drugs Other bined tions idated
Sales to
Unaffiliates $300 $425 $370 $70 $1,165 $1,165
Intersegment
Revenue 20 90 100 10 220 $(220)
$320 $515 $470 $80 $1,385 $(220) $1,165

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Chapter 13 - Segment and Interim Reporting

P13-11 (continued)

d. Disclosure of geographic areas' revenue (in thousands)

Geographic Area Unaffiliated Revenue


United States $ 820
Total Foreign 345 *
Total $1,165
Significant country:
Mexico $ 245

*Individual foreign countries exceeding 10% of total unaffiliated revenue ($1,165)


would be listed separately. In this case, only Mexico would be reported separately.

E13-12 Different Reporting Methods for Interim Reports [CMA Adapted]

1. Not acceptable. Revenue should be recognized when realized.

2. Acceptable. The gross profit method may be used for interim reports.

3. Acceptable. Costs may be allocated on a reasonable basis.

4. Acceptable. A recovery to original cost may be recorded in a subsequent interim


period.

5. Not acceptable. Gains are recognized in the period of the sale.

6. Acceptable. Costs may be allocated on a reasonable basis.

7. Not acceptable. FASB 154 requires that a change in depreciation in long-lived


assets be accounted for as a change in estimate effected by a change in
accounting principle. The current and prospective application is used, and no
cumulative effect, nor any retrospective restatement, is used for this change.

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Chapter 13 - Segment and Interim Reporting

13-13 Segment Reporting Workpaper and Schedules

a. (1) Operating Segments___________ Corporate Intersegment Consol-


A B C D Admin. Combined Eliminations idated

Revenues:
Sales to unaffil-
Iated customers 280,000 130,000 340,000 60,000 810,000 810,000
Intersegment sales 60,000 18,000 12,000 90,000 (90,000)
Total revenue 340,000 130,000 358,000 72,000 900,000 (90,000) 810,000
Operating costs:
Traceable costs (245,000) (90,000) (290,000) (82,000) (707,000) 90,000 (617,000)
Allocateda (17,000) (6,500) (17,900) (3,600) (45,000) (45,000)
Segment profit
(loss) 78,000 33,500 50,100 (13,600) 148,000 -0- 148,000
Other items:
General corporate
expenses (20,000) (20,000) (20,000)
Income from
continuing
operations 78,000 33,500 50,100 (13,600) (20,000) 128,000 -0- 128,000

Assets:
Segment 400,000 105,000 500,000 75,000 1,080,000 1,080,000
General corporate 120,000 120,000 120,000
Total assets 400,000 105,000 500,000 75,000 120,000 1,200,000 1,200,000
a
$17,000 = ($340,000 / $900,000) x $45,000
$ 6,500 = ($130,000 / $900,000) x $45,000
$17,900 = ($358,000 / $900,000) x $45,000
$ 3,600 = ($ 72,000 / $900,000) x $45,000

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P13-13 (continued)

(2) Segment Segment


Segments Revenuea Profitb Assetsc
A Yes Yes Yes
B Yes Yes No
C Yes Yes Yes
D No No No

a
Separately reportable if segment revenue greater than or equal to
$90,000 ($900,000 combined revenue x .10).
b
Separately reportable if separate segment profit or loss greater
than or equal to $16,160 ($161,600 x .10).

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. The absolute
value of the total segment profit of $161,600 for the three segments (A, B, and C)
reporting segment profits exceeded the total segment loss ($13,600) for the segment
reporting a loss (segment D only).
c
Separately reportable if segment assets greater than or equal to
$108,000 ($1,080,000 total operating segment assets x .10).

A, B, and C are separately reportable.

b. First, the revenues and long-lived assets must be disclosed for the domestic
operations and, in total, for all foreign operations. Then, a materiality test must be
applied to determine if the revenues or long-lived, productive assets for a specific
country are material. A 10 percent materiality test is used.

Country Revenuea Long-Lived Assetsb


A Domestic Yes $200,000 Yes
B Foreign Yes 52,500 No
C Foreign Yes 250,000 Yes
D Foreign No 37,500 No
$540,000

a
Separately reportable if country’s revenue to outsiders greater than or
equal to $81,000 (consolidated revenue of $810,000 x 10).
b
Separately reportable if long-lived, productive assets, which are one-half of total
assets, are greater than or equal to $54,000 (total long-lived, productive assets
of $540,000 x .10).

Foreign countries B and C are separately reportable.

c. Sales greater than or equal to $81,000 to a single customer would be noted.


(Consolidated revenue of $810,000 x .10)

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Chapter 13 - Segment And Interim Reporting

P13-14 Segment Reporting Workpaper and Schedules

a. Calvin, Inc.
Segmental Disclosure Workpaper
For the Year Ended December 31, 20X1

Corporate
Operating Segment Adminis- Intersegment Consol-
Apparel Building Chemical Furniture Machinery tration Combined Eliminations idated

Revenue:
Sales to unaffil-
iated customers 870,000 750,000 55,000 95,000 180,000 1,950,000 1,950,000
Intersegment sales 5,000 15,000 140,000 160,000 (160,000) -0-
Total sales 870,000 750,000 60,000 110,000 320,000 2,110,000 (160,000) 1,950,000

Expenses:
Cost of goods sold (480,000) (450,000) (42,000) (78,000) (150,000) (1,200,000) 160,000 (1,040,000)
Selling expenses (160,000) (40,000) (10,000) (20,000) (30,000) (260,000) (260,000)
Traceable expenses (40,000) (30,000) (6,000) (12,000) (18,000) (106,000) (106,000)
Allocated general
corporate expenses (80,000) (75,000) (7,000) (13,000) (25,000) (200,000) (200,000)
Total segment
Expenses (760,000) (595,000) (65,000) (123,000) (223,000) (1,766,000) 160,000 (1,606,000)
Segment profit 110,000 155,000 (5,000) (13,000) 97,000 344,000 -0- 344,000

Unallocated general
corporate expenses (35,000) (35,000) (35,000)
Income from con-
tinuing operations
before taxes 110,000 155,000 (5,000) (13,000) 97,000 (35,000) 309,000 -0- 309,000

Assets:
Segment 610,000 560,000 80,000 90,000 140,000 1,480,000 1,480,000
General corporate 125,000 125,000 125,000
Total assets 610,000 560,000 80,000 90,000 140,000 125,000 1,605,000 1,605,000

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Chapter 13 - Segment And Interim Reporting

P13-14 (continued)

b. Separately reportable segments.

Segment Segment
Revenuea Profitb Assetsc
Apparel Yes Yes Yes
Building Yes Yes Yes
Chemical No No No
Furniture No No No
Machinery Yes Yes No
a
Separately reportable if segment's total sales greater than or equal to $211,000
(combined total sales of $2,110,000 x .10).
b
Separately reportable if segment's profit greater than or equal to $36,200
(combined profitable segments' profits of $362,000 x .10).
c
Separately reportable if segment's assets greater than or equal to $148,000
(combined assets of operating segments of $1,480,000 x .10).

The Apparel, Building, and Machinery segments are separately reportable


because they pass at least one of the three 10 percent tests.

Comprehensive 75 percent test: $1,800,000 / $1,950,000 = 92.3%

Sales to unaffiliated customers of the separately


reportable segments > 75%
Sales to unaffiliated customers for all segments

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Chapter 13 - Segment And Interim Reporting

P13-14 (continued)

c. Calvin, Inc.
Footnote X
Information about the Company's Operations in Different Operating Segments

Operating Segments Intersegment


Apparel Building Machinery Others Eliminations Consolidated
Sales to unaffiliated customers $870,000 $750,000 $180,000 $150,000 $1,950,000
Intersegment sales 140,000 20,000 $(160,000) -0-
Total revenue $870,000 $750,000 $320,000 $170,000 $(160,000) $1,950,000

Segment profit $110,000 $155,000 $ 97,000 $(18,000) $ 344,000

Unallocated general corp. expenses (35,000)


Income from continuing operations $ 309,000

Segment assets $610,000 $560,000 $140,000 $170,000 $1,480,000

General corporate assets 125,000


Total assets $1,605,000

Depreciation expense $ 60,000 $ 50,000 $ 25,000 $ 21,000 $ 156,000

Capital expenditures $ 20,000 $ 30,000 $ 15,000 $ -0- $ 65,000

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 $1,940,000 Total profit and loss for reportable segments $362,000
Other revenues 170,000 Other loss (18,000)
Elimination of intersegment revenues (160,000) General corporate expenses (35,000)
Total consolidated revenues $1,950,000 Income before taxes $309,000

Reconciliation of Reportable Segment Assets to Consolidated Assets:


Total assets of reportable segments $1,310,000
Other assets 170,000
General corporate assets 125,000
Consolidated total assets $1,605,000

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Chapter 13 - Segment And Interim Reporting

P13-14 (continued)

d. Schedule showing three ten percent tests with changes in segment assets:

Segment Profit Segment


Revenue (Loss) Assets

Apparel $ 870,000 = 41.2% $110,000 = 30.4% $ 610,000 = 41.2%


$2,110,000 $362,000* $1,480,000

Building $ 750,000 = 35.6% $155,000 = 42.8% $ 460,000 = 31.1%


$2,110,000 $362,000 $1,480,000

Chemical $ 60,000 = 2.8% $ 5,000 = 1.4% $ 80,000 = 5.4%


$2,110,000 $362,000 $1,480,000

Furniture $ 110,000 = 5.2% $ 13,000 = 3.6% $ 190,000 = 12.8%


$2,110,000 $362,000 $1,480,000

Machinery $ 320,000 = 15.2% $ 97,000 = 26.8% $ 140,000 = 9.5%


$2,110,000 $362,000 $1,480,000

* The total of the three positive segment incomes


($362,000 = $110,000 + $155,000 + $97,000)

Results of the 10 percent tests to determine if separately reportable:

Revenue Profit Assets


Apparel Yes Yes Yes
Building Yes Yes Yes
Chemical No No No
Furniture No No Yes*
Machinery Yes Yes No

* The Furniture segment now becomes a separately reportable segment because its
assets are greater than 10% of the total assets.

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Chapter 13 - Segment And Interim Reporting

P13-15 Interim Income Statement

a. Estimate of effective annual tax rate at end of second quarter:

Estimated
Annual
Amounts

Income from continuing operations $600,000


Less: Dividend exclusion (30,000)
Estimated annual taxable income $570,000
Combined tax rate x 50%
Estimated annual taxes before credits $285,000
Less: Business tax credit (15,000)
Estimated income taxes for year $270,000

Estimated effective annual tax rate ($270,000/$600,000) = 45%

b. Chris, Inc.
Income Statement
For Three Months Ended June 30, 20X2

Sales $850,000
Cost of goods sold (525,000) a
Gross profit $325,000
Operating expense ($230,000 - $45,000
factory rearrangement deferred) (185,000)
Income before taxes $140,000
Income taxes (68,000)
Net income $ 72,000

a
Computation of Cost of Goods Sold

Cost of goods sold as given $420,000


Add: LIFO inventory liquidation
[7,500 x ($26 - $12)] 105,000
Adjusted cost of goods sold $525,000
b
Computation of Income Taxes

Income (Loss) Estimated Tax (Benefit)


Before Taxes Effective Less Reported
Interim Current Year- Annual Year- Previously in this
Period Period to-date Tax Rate to-date Provided Period

1 100,000 100,000 40% 40,000 -0- 40,000

2 140,000 240,000 45% 108,000 40,000 68,000

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P13-16 Interim Income Statement

a. Estimated effective annual tax rate as of the end of the second quarter:

Estimated
Annual
Amounts

Income from continuing operations $600,000


Less: Dividends received deduction (75,000)
Estimated taxable income $525,000
Combined taxable rate 40%
Estimated tax before credits $210,000
Less: Business tax credit (15,000)
Estimated income taxes $195,000

Estimated effective annual tax rate ($195,000 / $600,000) = 32.5%

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Chapter 13 - Segment And Interim Reporting

P13-16 (continued)

b. Malta Corporation
Income Statement
For Three Months Ended June 30, 20X1

Sales $1,200,000
Cost of goods sold:
Beginning inventory $ 78,000
Purchases 650,000
Goods available $728,000
Less: Ending inventory (80,000) a
$648,000
Less: Recovery from LCM (4,000) (644,000)
Gross profit $ 556,000
Operating expense (320,000)
Income before taxes $ 236,000
b
Income taxes (87,950)
Net income $ 148,050

a
Computation of ending inventory

Beginning inventory $ 78,000


Purchases 650,000
Goods available $728,000
Less: Estimated cost of sales
(.54 x $1,200,000) (648,000)
Estimated ending inventory $ 80,000

b
Computation of income taxes
Income (Loss) Estimated Tax (Benefit)
Before Taxes Effective Less Reported
Current Year- Annual Year- Previously in This
Period Period to-date Tax Rate to-date Provided Period

1 (90,000) (90,000) 45.0% (40,500) - (40,500)


2 236,000 146,000 32.5%c 47,450 (40,500) 87,950
c
See solution to part a.

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Chapter 13 - Segment And Interim Reporting

P13-17 Evaluating Foreign Operations

a. Profit or loss for each geographic area:

U.S. New Zealand Singapore Australia


Sales to unaffiliated $2,500 $320 $60 $120
Interarea sales 100 __ 10
Total revenues $2,600 $320 $70 $120
Operating expenses 1,820 290 70 30
Allocated costs 100a 12.8 2.4 4.8
Operating profit (loss) $ 680 $ 17.2 $ (2.4) $ 85.2
a
$100 = ($2,500 sales to unaffiliated / $3,000 total sales to unaffiliated) x $120
common costs to be allocated

b. The company must report the following, unless it is impracticable to do so:

a. 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. If revenues from external customers
generated in an individual country are material, then the revenues for that
country shall be separately disclosed.

b. 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. If assets in an individual foreign country are material, then the amounts
of assets held in that specific country shall be disclosed separately.

Total foreign sales to unaffiliates = $ 500 = 16.6%


Consolidated sales to unaffiliates $3,000

Total foreign assets = $ 500 = 18.5%


Total long-lived assets $2,700

Revenues and long-lived assets for domestic and total foreign operations must be
disclosed.

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Chapter 13 - Segment And Interim Reporting

P13-17 (continued)

c. Separately reportable foreign segments:

Sales to Percent of
Geographic Unaffiliated Consolidated Separately
Area Customers Revenues of $3,000 Reportable

Domestic $2,500 83.3% Yes


New Zealand 320 10.7 Yes
Singapore 60 2.0 No
Australia 120 4.0 No
Total $3,000 100.0%

Percent of Total
Geographic Long-lived Separately
Area Assets Assets of $2,700 Reportable

Domestic $2,200 81.4% Yes


New Zealand 280 10.4 Yes
Singapore 140 5.2 No
Australia 80 3.0 No
Total $2,700 100.0%

For both of these tests, the New Zealand operations are separately reportable
as a significant foreign operation, using a 10 percent materiality threshold.

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P13-18 Interim Accounting Changes

a. A change in accounting principle of FIFO to LIFO requires the retrospective


application of the newly adopted principle to the earliest balance sheet presented
and then all subsequent financial reports are adjusted to the new method. The
selected interim data in the problem was computed using the FIFO method.
Adjusting each interim period for the difference in cost of goods sold under LIFO,
with its related direct effect of the tax impact (40 percent), results in the following
comparative interims:

Earnings
Net Gross Operating from Operations, Net
Quarter Ended Sales Profit Expenses Before Tax Earnings
20X7:
March 31 $388 $123 $106 $17 $10.2
June 30 406 123 105 18 10.8
September 30 428 137 119 18 10.8
20X6:
March 31 394 127 112 15 9.0
June 30 416 138 119 19 11.4
September 30 403 123 117 6 3.6
December 31 385 125 103 22 13.2

b. This change from the straight-line method to the accelerated method of depreciation
because of a change in the estimated future benefits is a change in accounting
estimate that is effected by a change in accounting principle. FASB 154 requires
that this type of accounting change be accounted for in (a) the period of change, if
the change affects only that period, or (b) the period of change and future periods if
the change has both current effects and future effects. Prechange financial
statements are not restated or adjusted! Thus, the company would use the newly
adopted method (straight-line) for the third quarter ending September 30, and for
future periods for the life of the asset. Footnote disclosures would include the effects
of the change on income from continuing operations and also justification for the
change.

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P13-18 (continued)

c. Change in the accounting principle of accounting for long-term accounting contracts


from the completed contract to the percentage-of-completion method requires the
retrospective application of the new method (percentage-of-completion) to the
balance sheet at the beginning of the year of the earliest period presented, and
then adjustment of all subsequent financial statements, both annual and interim, to
the newly adopted method. The impacts on sales and gross profits for each of the
quarters are as follows:

Completed Percentage-of- Effect of


Contract Completion Change
Gross Gross Gross
Quarter Ended Sales Profit Sales Profit Sales Profit
20X7:
March 31 $ 80 $20 $60 $30 $(20) $10
June 30 -0- -0- 55 30 55 30
September 30 100 50 70 40 (30) (10)
20X6:
March 31 -0- -0- 60 40 60 40
June 30 150 100 40 20 (110) (80)
September 30 -0- -0- 50 30 50 30
December 31 60 40 50 30 (10) (10)

Parentheses around the amount in the Effect of Change column indicate a


reduction of the reported amount. The net earnings would be net-of-tax at the 40
percent tax rate.

Earnings
Net Gross Operating from Operations, Net
Quarter Ended Sales Profit Expenses Before Tax Earnings
20X7:
March 31 $368 $143 $106 $37 $22.2
June 30 461 165 105 60 36.0
September 30 398 141 119 22 13.2
20X6:
March 31 454 179 112 67 40.2
June 30 306 71 119 (48) (28.8)
September 30 453 178 117 61 36.6
December 31 375 124 103 21 12.6

Note that the revenue and income streams are quite volatile after the change in
accounting method. Of special note is that the previously reported continuing
operations earnings of $19.2 in the second quarter of 20X6, ending June 30, 20X6,
is changed to a loss of $28.8. Introducing this amount of volatility into an income
stream may be a reason that a firm would not want to make an accounting change.

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Chapter 13 - Segment And Interim Reporting

P13-19 Segment Disclosures in Financial Statements

a. Multiplex Inc.
Schedule for 10% Revenue Test
For the Year Ended December 31, 20X5
(in millions)

Segment Percent of Combined Reportable


Segment Revenue Revenue of $628 Million Segment
Car Rental $ 39 6.2% No
Aerospace 204 32.5 Yes
Communications 60 9.6 No
Health/Fitness 50 8.0 No
Heavy Equipment 275 43.8 Yes
Total $628

Multiplex Inc.
Schedule for the 10% Segment Profit or Loss Test
For the Year Ended December 31, 20X5
(in millions)
Segment Percent of Test Reportable
Segment Profit (loss) Amount of $105 million Segment
Car Rental $ 17 16.2% Yes
Aerospace 6 5.7 No
Communications 18 17.1 Yes
Health/Fitness 20 19.0 Yes
Heavy Equipment 44 41.9 Yes
Total $105

Determination of the profit of each operating segment (in $millions)

Car Communi- Health/ Heavy


Rental Aerospace cations Fitness Equipment
Revenue $ 39 $ 204 $ 60 $ 50 $ 275
Cost of goods sold (141) (177)
Selling expenses (16) (42) (29) (23) (37)
Other traceable
expenses (4) (8) (11) (5) (10)
Allocation of
common costs (2) (7) (2) (2) (7)

Operating profit $ 17 $ 6 $ 18 $ 20 $ 44

Total profits (in $millions) amount to $105: ($17 + $6 + $18 + $20 + $44).

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Chapter 13 - Segment And Interim Reporting

P13-19 (continued)

Multiplex Inc.
Schedule for Segment Assets Test
For the Year Ended December 31, 20X5
(in millions)

Percent of
Operating Segment Test Amount Reportable
Segment Assets of $472 million Segment
Car Rental $ 20 4.2% No
Aerospace 107 22.7 Yes
Communications 70 14.8 Yes
Health/Fitness 80 16.9 Yes
Heavy Equipment 195 41.3 Yes
Total $472

Multiplex Inc.
Schedule of Reportable Segments
For the Year Ended December 31, 20X5

Revenue Profit Assets


Segment Test Test Test Segment
Car Rental No Yes No Yes
Aerospace Yes No Yes Yes
Communications No Yes Yes Yes
Health/Fitness No Yes Yes Yes
Heavy Equipment Yes Yes Yes Yes

b. Because all of Multiplex's operating segments are reportable, the 75% revenue
test is satisfied. The reportable operating segments account for 100% of the
sales to unaffiliated customers.

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Chapter 13 - Segment And Interim Reporting

P13-19 (continued)

c. Information About Multiplex's Operations in Different Industry Segments:

Multiplex Operations
Industry Segments
(in $millions)

Car Aero- Communi- Health/ Heavy


Item Rental space Cations Fitness Equip. Combined
Sales to:
unaffiliated
customers $34 $204 $60 $50 $250 $598
Intersegment sales 5 25 30
Total revenue $39 $204 $60 $50 $275 $628

Depreciation $ 4 $ 15 $ 4 $ 5 $ 25 $ 53
Segment profit 17 6 18 20 44 105
Segment assets 20 107 70 80 195 472
Expenditures for
segment assets 3 30 15 40 88

Reconciliation of Reportable Segment Profit and Loss


_________to Consolidated Profit and Loss_________

Total profit or loss for reportable segments $105


Elimination of unrealized intersegment profits (7)
Other corporate expenses (unallocated) (33)
Income before income taxes and extraordinary items $ 65

Reconciliation of Reportable Segment Revenues


_________to Consolidated Revenues_________

Total revenues for reportable segments $628


Elimination of intersegment revenues (30)
Total consolidated revenues $598

Reconciliation of Reportable Segment Assets


_________to Consolidated Assets_________

Total assets for reportable segments $472


Intercompany receivable (15)
Unrealized company profit ( 7)
(a reduction of the carrying amount of property,
plant and equipment)
Unallocated corporate assets 25
Consolidated total $475

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Chapter 13 - Segment And Interim Reporting

P13-20 Reporting Operations in Different Countries

a. First, FASB 131 requires companies to disclose revenues and long-lived,


productive assets in total for domestic and all foreign operations. Then, if revenues
or long-lived assets are material in any single country, that disclosure must be
made on a country basis. Therefore, the company would disclose total revenues
and total long-lived assets for the domestic operations and for total foreign
operations.

Revenues:

Sales to unaffiliated customers from operations in France, Mexico, and Japan


total $426,000,000. Total sales to unaffiliated customers for all geographic
areas, including Domestic, are $856,000,000.

$426,000,000 / $856,000,000 = 49.8%

Long-lived, productive assets:

Long-lived, productive assets of foreign operations total $270,000,000. Total


long-lived productive assets for all geographic areas, including Domestic, are
$505,000,000.
(Note that inventories and other current assets or current liabilities are not
long-lived, productive assets. Therefore, unrealized intercompany profit or
interarea, short-term receivables/payables do not affect the computation of
the long-lived productive assets for purposes of this disclosure.)

$270,000,000 / $505,000,000 = 53.5%

b. The determination of which foreign operations, on a country basis, are separately


reportable depends upon two tests to determine which individual foreign operations
must be separately disclosed. Watson uses a 10 percent materiality threshold for
these tests.

The 10% revenue test is shown below:

Watson Inc.
Revenue Test Applied to Individual Foreign Operations
For the Year Ended December 31, 20X5

Sales to
Geographic Unaffiliated Percent of Consolidated Separately
Area Customers Revenue of $856,000,000 Reportable
Domestic $430,000,000 50.2% Yes
France 300,000,000 35.0 Yes
Mexico 36,000,000 4.2 No
Japan 90,000,000 10.5 Yes
Total $856,000,000

The revenue test indicates that the French and Japanese operations should be
separately reported.

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Chapter 13 - Segment And Interim Reporting

P13-20 (continued)

The long-lived, productive assets test is shown below:

Watson Inc.
Long-Lived, Productive Assets Test Applied to Individual Foreign Operations
For the Year Ended December 31, 20X5

Long-Lived, Percent of Total


Geographic Productive Long-Lived Assets Separately
Area Assets of $505,000,000 Reportable
Domestic $235,000,000 46.5% Yes
France 160,000,000 31.7 Yes
Mexico 29,000,000 5.7 No
Japan 81,000,000 16.0 Yes
Consolidated $505,000,000

The company will disclose the amounts of long-lived, productive assets in France
and in Japan.

c. Required disclosure of geographic information:

Watson Inc.
Geographic Information
(In $millions)
Long-Lived
Revenue Assets
United States $430 $235
France 300 160
Japan 90 81
Other 36 29
$856 $505

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Chapter 13 - Segment And Interim Reporting

P13-21 Matching Key Terms

1. L

2. R

3. D

4. O

5. A

6. F

7. I

8. K

9. M

10. C

11. N

12. H

13. Q

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