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 segments assets Combined assets of all industry segments Q13-4 Whatever items are used for internal decision-making purposes to measure the operating segments 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
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

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

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.

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

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).

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

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.

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

C13-3 a.

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.

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 which 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 Tools .67 .73 .50 Yes Fastening Systems .16 .16 .23 Yes Household Products .08 .10 .17 Yes Plumbing Products .06 .11 .06 Yes Security Systems .03 .02 .04 No

Revenue Profit Assets Reportable

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.

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

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 companys 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 longlived 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.

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

C13-5

Research Related to Segment Reporting

a. A great amount of information can be found on a companys homepage ranging from financial information to product information and company profiles. The internet address for many companies includes their company name. A good frontend site for the Fortune 500 companies is located at http://www.fortune.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. Alternatively, 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 a & b.

Research Related to Interim Reporting Internet URL: http://www.sec.gov/edgarhp.htm

The above Internet address provides access to the EDGAR database homepage. From the homepage, the user is able to select "Search the EDGAR Database," then "Select Quick Forms Lookup." The user can then select to search for a company form. (Hint: Provided the students have selected a public company as instructed in the case, finding the Form 10-Q is easy.) Simply request "all" or just "10-Q" forms in the search. The search can provide a list of all forms on EDGAR for the company using the data range of "entire database" available. 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.

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

SOLUTIONS TO EXERCISES E13-1 a. 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 $77,500 ($775,000 x .10) Segment profit or loss greater than $10,370 ($103,700 total profit, excluding loss segments x .10) 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 Total revenue from unaffiliated customers Yes, the 75 percent test is met.

$655,000 = 87.3% $750,000

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

E13-2 1. b

Multiple-Choice Questions on Segment Reporting [AICPA Adapted] Sales Traceable operating expenses Indirect operating expenses (3/4 x $120,000) Operating profit $ 750,000 (325,000) (90,000) 335,000

2. 3.

d a Sales ($1,800,000 x .60) Traceable costs Income before common costs Cost allocated [($480,000 / $600,000) x $350,000] Operating profit Segment 3 $1,080,000 (600,000) $ 480,000 (280,000) 200,000 20X2 Total $1,800,000 (1,200,000) $ 600,000

4.

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

5. 6.

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

7. 8. 9. 10. 11. 12.

b d c c d a

$260,000 =

[($2,000,000 + $600,000) x .10]

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

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

E13-3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. d c a b c a a b b b b

Multiple-Choice Questions on Interim Reporting [AICPA Adapted]

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

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 which benefit other interim periods should be allocated to the interim periods benefitted. 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.

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

E13-4 a.

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: $11,040 = 920 units x $12 lifo cost $5,760 = 640 units x $9 ($21 replacement cost less $12 lifo cost) 16,800 11,040 5,760

b.

Inventory 7,680 Excess of Replacement Cost over LIFO Cost of Inventory Liquidation 5,760 Cost of Goods Sold Accounts Payable Replace 640 units of lifo base: $7,680 = 640 units x $12 lifo cost $768 = 640 units x $1.20 difference between actual and estimated replacement cost $12,672 = 640 units x $19.80 actual cost of replacement

768 12,672

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

E13-5

Inventory Write-Down and Recovery Cost of Units Sold $10,200 (1,000 x $10.20) $10.20 is unit cost from 20X1 $5,050 (500 x $10.10) + Inventory Adjustment to Market $800 (8,000 x $.10) write down to $10.10 $750 (7,500 x $.10) recovery to $10.20 original cost $1,800 (6,000 x $.30) write down to $9.90 $400 (4,000 x $.10) recovery to $10.00 = Cost of Goods Sold $11,000

Quarter I

II

4,300

III

$15,300 (1,500 x $10.20)

17,100

IV

$19,800 (2,000 x $9.90)

19,400

Total Annual basis: $51,000 (5,000 x $10.20) + $800 (4,000 x $.20) write down from $10.20 to $10.00 =

$51,800

$51,800

Note that $10.00 effectively became the new unit cost basis for the inventory items as of December 31, 20X2. If further inventory market declines are suffered in the early quarters during 20X3, recoveries will be permitted only to the extent of $10.00.

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

E13-6

Multiple-Choice Questions on Income Taxes at Interim Dates [AICPA Adapted]

1. 2.

a b $170,000 x .45 = $ 76,500 $130,000 x .40 = (52,000) Third quarter $ 24,500 Net operating loss credit ($100,000 x .40) Other tax credit Total credits Estimated annual operating loss Tax benefit rate ($50,000 / $100,000) x Operating loss in first quarter Tax benefit in first quarter $ 40,000 10,000 $ 50,000 $100,000 .50 $ 20,000 $ 10,000

3.

4. 5.

c c .25 x $200,000 = $50,000.

E13-7

Significant Foreign Operations Sales to Unaffiliated Customers $364,000 252,000 72,000 58,000 47,000 $793,000 Percent of Consolidated Revenue of $793,000 45.9% 31.8 9.1 7.3 5.9

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

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

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

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. Service contracts $6,100,000 ($3,900,000 + $2,200,000 under common control) $4,650,000 $5,400,000

Computer software Computer software

E13-9 a.

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 / $1,500,000 = .48 $1,500,000 $ 60,000 (80,000)

(20,000) $1,480,000 .50 $ 740,000 (20,000) $ 720,000

b.

Income Tax Expense 144,000 Income Tax Payable Record first-quarter tax provision: $144,000 = $300,000 x .48 effective tax rate

144,000

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E13-10

Operating Loss Tax Benefits Income (Losses) Before Taxes YearPeriod to-Date $(100,000) $(100,000) 80,000 (20,000) 160,000 140,000 400,000 540,000 $ 540,000 Est. Annual Effect Tax Rate .40 .40 .45 .45 Tax (Benefit) Less Reported YearPrevious in to-Date Provided Period $(40,000) $(40,000) (8,000) $(40,000) 32,000 63,000 (8,000) 71,000 243,000 63,000 180,000 $243,000

Period 1 2 3 4 Total

E13-11 a.

Disclosure Tests Including a Finance Segment

Three 10 percent significance tests 1. Revenue Operating Segment Textiles Paper Goods Finance Total Percent of Combined Revenue of $1,360 62.5% 30.1 7.4 Separately Reportable Yes Yes No

Revenue $ 850 410 100 $1,360

Note that the combined revenue of the Finance segment includes interest revenue from external parties and interest revenue intersegment financing. 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. 2. 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 70.0% 27.5 2.5 Separately Reportable Yes Yes No

both from not the the

= $850 - ($400 + $30 + $100 + $40) = $410 - ($180 + $10 + $80 + $30) = $100 - ($10 + $40 + $10 + $30)

Note that the operating profit of the Finance segment includes interest expense. Interest expense, external or intersegment, is not included in this company for nonfinancing segments.

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

E13-11 3.

(continued)

Segment assets Operating Segment Textiles Paper Goods Finance Total Segment Assets $3,000 2,000 1,000 $6,000 Percent of Test Amount of $6,000 50.0% 33.3 16.7 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.

b.

Comprehensive disclosure tests 1. 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 ($1,260 / $1,260)

800 400 60

$1,260 $1,260

100%

2.

The 10-segment test: The company has only three separately reportable segments.

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

E13-12

Industry Segment and Geographic Area Revenue Tests

a.

Operating segments revenue test (in thousands) Combined Revenue $ 320 515 470 80 $1,385 Percent of Combined Revenue of $1,385 23.1% 37.2 33.9 5.8 Separately Reportable Yes Yes Yes No

Operating Segment Ethical Drugs Nonprescription Drugs Generic Drugs Industrial Chemicals Total

b.

Geographic Area revenue test (in thousands) Unaffiliated Revenue $ 820 245 100 $1,165 Percent of Consolidated Revenue of $1,165 70.4% 21.0 8.6 Separately Reportable Always Yes* No*

Geographic Area Domestic Mexico Taiwan Total

*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) NonpreEthical scription Generic Drugs Drugs Drugs Other

Combined $1,165 220 $1,385

Eliminations

Consolidated $1,165

Sales to Unaffiliates Intersegment Revenue

$300 20 $320

$425 90 $515

$370 100 $470

$70 10 $80

$(220) $(220)

$1,165

d.

Disclosure of geographic areas' revenue (in thousands) Geographic Area United States Total Foreign Total Significant country: Mexico Unaffiliated Revenue $ 820 345* $1,165 $ 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.

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E13-13 a. b. c. d.

Different Reporting Methods for Interim Reports [CMA Adapted]

Not acceptable. Revenue should be recognized when realized. Acceptable. The gross profit method may be used for interim reports. Acceptable. Costs may be allocated on a reasonable basis. Acceptable. A recovery to original cost may be recorded in a subsequent interim period. Not acceptable. Gains are recognized in the period of the sale. Acceptable. Costs may be allocated on a reasonable basis.

e. f.

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

SOLUTIONS TO PROBLEMS P13-14 a. (1) A B C D Corporate Admin. Combined Intersegment Eliminations Consolidated Segment Reporting Workpaper and Schedules

Revenues: Sales to unaffiliated customers 280,000 130,000 340,000 60,000 Intersegment sales 60,000 18,000 12,000 Total revenue 340,000 130,000 358,000 72,000 Operating costs: Traceable costs (245,000) (90,000) (290,000) (82,000) Allocateda (17,000) (6,500) (17,900) (3,600) Segment profit (loss) 78,000 33,500 50,100 (13,600) Other items: General corporate expenses Income from continuing operations 78,000 33,500 50,100 (13,600) Assets: Segment General corporate Total assets
a

810,000 90,000 900,000 (707,000) (45,000) 148,000

810,000 (90,000) (90,000) 90,000 810,000 (617,000) (45,000) 148,000

-0-

(20,000)

(20,000)

(20,000)

(20,000)

128,000

-0-

128,000

400,000 400,000

105,000 105,000

500,000 500,000

75,000 75,000 120,000 120,000

1,080,000 120,000 1,200,000

1,080,000 120,000 1,200,000

$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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McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

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

Separately reportable if segment revenue greater than or equal to $90,000 ($900,000 combined revenue x .10). 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.

a. 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 A Domestic B Foreign C Foreign D Foreign Revenuea Yes Yes Yes No Long-Lived Assetsb $200,000 Yes 52,500 No 250,000 Yes 37,500 No $540,000 than or

Separately reportable if countrys revenue to outsiders greater equal to $81,000 (consolidated revenue of $810,000 x .10).
b

Separately reportable if long-lived assets, which are one-half of total assets, are greater than or equal to $54,000 (total long-lived 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)

- 23 -

P13-15 a.

Segment Reporting Workpaper and Schedules [AICPA Adapted] Calvin, Inc. Segmental Disclosure Workpaper For the Year Ended December 31, 20X1 Corporate Administration

Apparel Revenue: Sales to unaffiliated customers Intersegment sales Total sales

Operating Segment Building Chemical Furniture

Machinery

Combined

Intersegment Eliminations

Consolidated

870,000 870,000

750,000 750,000

55,000 5,000 60,000

95,000 15,000 110,000

180,000 140,000 320,000

1,950,000 160,000 2,110,000

(160,000) (160,000)

1,950,000 -01,950,000

Expenses: Cost of goods sold (480,000) (450,000) Selling expenses (160,000) (40,000) Traceable expenses (40,000) (30,000) Allocated general corporate expenses (80,000) (75,000) Total segment expenses (760,000) (595,000) Segment profit 110,000 155,000 Unallocated General corporate expenses Income from continuing operations before taxes Assets: Segment General corporate Total assets

(42,000) (10,000) (6,000) (7,000)

(78,000) (20,000) (12,000) (13,000)

(150,000) (30,000) (18,000) (25,000) (223,000) 97,000

(1,200,000) (260,000) (106,000) (200,000) (1,766,000) 344,000

160,000

(1,040,000) (260,000) (106,000) (200,000)

(65,000) (123,000) (5,000) (13,000)

160,000 -0-

(1,606,000) 344,000

(35,000)

(35,000)

(35,000)

110,000

155,000

(5,000)

(13,000)

97,000

(35,000)

309,000

-0-

309,000

610,000 610,000

560,000 560,000

80,000 80,000

90,000 90,000

140,000 140,000 125,000 125,000

1,480,000 125,000 1,605,000

1,480,000 125,000 1,605,000

- 24 -

P13-15 b.

(continued)

Separately reportable segments. 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 $211,000 (combined total sales of $2,110,000 x .10). Separately reportable if segment's profit greater than or equal to $36,200 (combined profitable segments' profits of $362,000 x .10). Separately reportable if segment's assets greater than or equal to $148,000 (combined assets of $1,480,000 x .10). reportable

The Apparel, Building, and Machinery segments are separately 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 Sales to unaffiliated customers for all segments

> 75%

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

P13-15 c.

(continued)

Calvin, Inc. Footnote X Information about the Company's Operations in Different Operating Segments Operating Segments Building Machinery $750,000 $180,000 140,000 $750,000 $320,000 $155,000 $ 97,000 Intersegment Eliminations $(160,000) $(160,000)

Sales to unaffiliated customers Intersegment sales Total revenue Segment profit Unallocated general corp. expenses Income from continuing operations Segment assets General corporate assets Total assets Depreciation expense Capital expenditures

Apparel $870,000 $870,000 $110,000

Others $150,000 20,000 $170,000 $(18,000)

Consolidated $1,950,000 -0$1,950,000 $ 344,000 (35,000) 309,000

$ $610,000 $560,000 $140,000 $170,000

$1,480,000 125,000 $1,605,000

$ 60,000 $ 20,000

$ 50,000 $ 30,000

$ 25,000 $ 15,000

$ 21,000 $ -0-

$ $

156,000 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

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

P13-15

(continued)

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

d. Schedule showing three ten percent tests with changes in segment assets: Segment Profit (Loss) $110,000 = 30.4% $362,000* Segment Assets $610,000 = 41.2% $1,480,000

Revenue Apparel $870,000 = 41.2% $2,110,000

Building

$750,000 = 35.6% $2,110,000

$155,000 = 42.8% $362,000

$460,000 = 31.1% $1,480,000

Chemical

$60,000 = $2,110,000

2.8%

$5,000 = $362,000

1.4%

$80,000 = $1,480,000

5.4%

Furniture

$110,000 = $2,110,000

5.2%

$13,000 $62,000

3.6%

$190,000 = 12.8% $1,480,000

Machinery

$320,000 = 15.2% $2,110,000

$ 97,000 = 26.8% $362,000

$140,000 = $1,480,000

9.5%

*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 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.

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

P13-16

Interim Income Statement

a. 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 (30,000) $570,000 x .50 $285,000 (15,000) $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 Cost of goods sold Gross profit Operating expense ($230,000 - $45,000 factory rearrangement deferred) Income before taxes Income taxes Net income $850,000 525,000a $325,000 185,000 $140,000 68,000b $ 72,000

Computation of Cost of Goods Sold Cost of goods sold as given Add: LIFO inventory liquidation [7,500 x ($26 - $12)] Adjusted cost of goods sold $420,000 105,000 $525,000

Computation of Income Taxes Income (Loss) Before Taxes Current YearPeriod to-date 100,000 140,000 100,000 240,000 Estimated Annual Effective Tax Rate .40 .45 Tax (Benefit) Less Reported YearPreviously in this to-date Provided Period 40,000 108,000 40,000 40,000 68,000

Interim Period 1 2

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

P13-17

Interim Income Statement

a. 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/$600,000) $600,000 (75,000) $525,000 .40 $210,000 (15,000) $195,000 = .325

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

P13-17 b.

(continued) Malta Corporation Income Statement For Three Months Ended June 30, 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

$1,200,000 $ 78,000 650,000 $728,000 (80,000)a $648,000 (4,000) $ $ $

644,000 556,000 320,000 236,000 87,950b 148,050

Computation of ending inventory Beginning inventory Purchases Goods available Less: Estimated cost of sales (.54 x $1,200,000) Estimated ending inventory $ 78,000 650,000 $728,000 (648,000) $ 80,000

Computation of income taxes Income (Loss) Before Taxes Current YearPeriod to-date (90,000) 236,000 (90,000) 146,000 Estimated Annual Effective Tax Rate .45 .325c Tax (Benefit) Less Reported YearPreviously in This to-date Provided Period (40,500) 47,450 (40,500) 87,950

Period 1 2
c

(40,500)

See solution to part a.

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

P13-18 a.

Interim Income Statement Burrows Company Schedule of Cost of Goods Sold For Quarter Ended June 30, 20X5

Inventory, April 1, 20X5 Cost of goods manufactured Goods available for sale Inventory, June 30, 20X5 Cost of goods sold__unadjusted Add: Excess of replacement cost of inventory liquidated over historical cost ($175,000 - $100,000) Cost of goods sold for second quarter__adjusted

900,000 1,000,000 $1,900,000 (800,000) $1,100,000 75,000 $1,175,000

b.

Burrows Company Schedule of Selling and General Expenses For Quarter Ended June 30, 20X5 Selling and general expenses incurred during the second quarter Add: Estimated property tax expense ($40,000 / 4 quarters) Allocated portion of advertising cost ($50,000 / 2 quarters) Total selling and general expenses for the second quarter

$300,000 10,000 25,000 $335,000

c.

Burrows Company Income Statement For Quarter Ended June 30, 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, net of taxes of $98,000 Net income $1,700,000 (1,175,000) $ 525,000 (335,000) $ 190,000 (67,600) $ 122,400 182,000 304,400

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

P13-18 d.

(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, 20X5 Estimated effective annual tax rate determined at the end of the second quarter Total tax expense for the six months ended June 30, 20X5 Less: Tax expense determined at the end of the first quarter ($150,000 x .32) Income tax expense for the second quarter

$150,000 190,000 $340,000 .34 $115,600 (48,000) $ 67,600

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

P13-19 a.

Evaluating Foreign Operations

Profit or loss for each geographic area: U.S. New Zealand Sales to unaffiliated $2,500 $320 Interarea sales 100 Total revenues $2,600 $320 Operating expenses 1,820 290 Allocated costs 100a 12.8 Operating profit (loss) $ 680 $ 17.2 Singapore $60 10 $70 70 2.4 $(2.4) Australia $120 $120 30 4.8 $ 85.2

$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 companys 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 is material, then the revenues for that country shall be separately disclosed. Long-lived productive assets (1) located in the entitys 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.

b.

Total foreign sales to unaffiliates Consolidated sales to unaffiliates Total foreign assets Total long-lived assets

$500 $3,000 $500 $2,700

= 16.6%

= 18.5%

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

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

P13-19 c.

(continued)

Separately reportable foreign segments: Sales to Unaffiliated Customers $2,500 320 60 120 $3,000 Percent of Consolidated Revenues of $3,000 83.3% 10.7 2.0 4.0 100.0%

Geographic Area Domestic New Zealand Singapore Australia Total

Separately Reportable Yes Yes No No

Geographic Area Domestic New Zealand Singapore Australia Total

Assets $2,200 280 140 80 $2,700

Percent of Total Long-lived Assets of $2,700 81.4% 10.4 5.2 3.0 100.0%

Separately Reportable Yes Yes No No

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

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

P13-20 a.

Interim Accounting Changes

Change to lifo is made effective as of the beginning of the current fiscal year. Prior interims for the current fiscal period are restated for the change. No restatement of prior years' interims is made. The change to lifo will affect cost of goods sold. The effect of the change will be an increase of $4,000 to cost of goods sold for each of the first three quarters of 20X2, and a resulting decrease of gross profit of $4,000 for each of the first three quarters of 20X2. The $20,000 difference on January 1, 20X2, between lifo and the prior inventory method is not relevant. Earnings in each of the first three quarters of 20X2 will be decreased by the net-of-tax effect of $2,400 ($4,000 x .60) Earnings from Continuing Operations $24.6 27.6 29.6 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 32.6 29.6 28 31 31 12

*The first and second quarters of 20X2 are restated for a change to the lifo inventory method. This change decreased income by $2,400, net-oftax.

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

P13-20

(continued)

b. Changes in accounting principles are made effective as of the first day of the current fiscal period. For Square Q Company, the cumulative effect is computed as of January 1, 20X2. The prior years' interims are not restated, although pro forma earnings must be presented which include the new accounting method. The accelerated method of depreciation will be used to determine the earnings from continuing operations for each of the first three quarters of 20X2, and the cumulative effect, net-of-tax, will be included in net earnings for the first quarter of 20X2. Cumulative effect as of January 1, 20X2: January 1, 20X2: Accumulated straight line depreciation Accumulated accelerated depreciation Difference Tax ($30 x .40 tax rate) Cumulative effect, 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. 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, net-of-tax. For example, in Quarter I, there is no difference in depreciation. In Quarter II, the restated earnings from continuing operations would be increased for the $600 decrease in depreciation, net-of-tax ($1,000 x .60). Quarter III would be increased by $1,800 ($3,000 x .60). Earnings from Continuing Operations $27 30.6 33.8 Pro Forma 27 21 32 27.2 31 26.8 11 8

Quarter Ended 20X2: March 31* June 30* September 30

Net Sales $388 406 428

Gross Profit $133 135 151

Net Earnings $ 8 35.6 33.8 Pro Forma 28 22 31 26.2 31 26.8 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. Net earnings for the first quarter of 20X2 includes the $18,000 decrease from the cumulative effect of the accounting change. Pro forma earnings are presented for 20X1.

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

P13-20

(continued)

c. Change in method of accounting for long-term accounting contracts requires the retroactive restatement of all prior interims, including those of previous years. 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. The effect on earnings from continuing operations will be the net-of-tax effect of the effect of the change on the gross profit. For example, the effect of the change on earnings for the first quarter of 20X2, ending March 31, will be $6 ($10 x .60). 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. Of special note is that the previously reported continuing operations earnings of $32 in the second quarter of 20X1, ending June 30, 20X1, is changed to a loss of $16. Introducing this amount of volatility into an income stream may be a reason that a firm may not want to make an accounting change.

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

P13-21 a.

Interim Income Statement for First Two Quarters Burnell Inc. Interim Income Statement Three Months Six Months Ended June 30, 20X5 Ended June 30, 20X5 Sales $1,540,000 $2,890,000 Cost of goods sold (1,080,000) (2,015,000) Gross profit $ 460,000 $ 875,000 Selling and general expenses (206,300) (405,800) Operating income $ 253,700 $ 469,200 Interest expense (55,000) (105,000) Income before taxes and cumulative effect $ 198,700 $ 364,200 Income tax expense (58,794) (116,544) Income before cumulative effect of change in accounting principle $ 139,906 $ 247,656 Cumulative effect of changing from the sum-of-the-years' digits to the straight-line method, net of taxes of $15,360 --32,640 Net income $ 139,906 $ 280,296 Supporting schedules: (a) Cost of goods sold: Quarter Ended June 30 Beginning inventory $ 320,000 Cost of goods manufactured 1,100,000 Total cost of goods available $1,420,000 Ending inventory (340,000) Cost of goods sold $1,080,000 (b) Selling and general expenses: Quarter Ended March 31 Selling and general expenses reported $200,000 Less: Depreciation expense (6,000) Warranty expense (40,500) Selling and general expenses not including depreciation and warranty expenses $153,500 Add: Warranty expense: $1,350,000 x .03 40,500 $1,540,000 x .02 Depreciation expense: $220,000 / 10 years = $22,000 per year / 4 quarters 5,500 Six Months Ended June 30 $ 250,000 2,105,000 $2,355,000 (340,000) $2,015,000

(a) (b)

(c)

(d)

Quarter Ended June 30 $ ---

Total $200,000 (6,000) (40,500)

170,000

$323,500 40,500 30,800

30,800

5,500

11,000

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

Total expenses

$199,500

$206,300

$405,800

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

P13-21

(continued) (c) Income tax expense: Income before tax for the six months ended June 30, 20X5 Estimated annual effective rate determined at June 30 Income tax expense for six months ended June 30, 20X5 Less: Income tax expense for the three months ended March 31, 20X5 Income tax expense for the second quarter ended June 30, 20X5

$364,200 .32 $116,544 (57,750) $ 58,794

(d) Cumulative effect of changing accounting principles: Accumulated depreciation at January 1, 20X5 (depreciation expense for 2091 through 2094) using the sum-of-the-years' digits method of depreciation: 10 + 9 + 8 + 7 ________________ 55

($240,000 - $20,000) x

$136,000

Accumulated depreciation at January 1, 20X5 (depreciation expense for 2091 through 2094) if the straight-line method had been used: 4 years ____________ = 10 years

($240,000 - $20,000) x

(88,000)

Cumulative effect before income taxes Income taxes (.32 x $48,000) Cumulative effect, net of taxes

$ 48,000 (15,360) $ 32,640

b.

Cost of goods sold for the second quarter if the market declines were considered to be permanent: Beginning inventory, April 1, 20X5 Cost of goods manufactured Cost of goods available Less ending inventory, June 30, 20X5 Cost of goods sold $ 315,000 1,100,000 $1,415,000 (330,000) $1,085,000

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

P13-22 a.

Segment Disclosures in Financial Statements Multiplex Inc. Schedule for 10% Revenue Test For the Year Ended December 31, 20X5 (in millions) Segment Revenue $ 39 204 60 50 275 $628 Percent of Combined Revenue of $628 Million 6.2% 32.5% 9.6% 8.0% 43.8% Reportable Segment No Yes No No Yes

Segment Car Rental Aerospace Communications Health/Fitness Heavy Equipment Total

Multiplex Inc. Schedule for the 10% Segment Profit or Loss Test For the Year Ended December 31, 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 16.2% 5.7% 17.1% 19.0% 41.9% 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 $105,000,000 ($17 + $6 + $18 + $20 + $44). P13-22 (continued) Multiplex Inc. Schedule for Segment Assets Test For the Year Ended December 31, 20X5
Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 1999

(in millions) Percent of Test Amount of $472 million 4.2% 22.7% 14.8% 16.9% 41.3%

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

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

P13-22

(continued)

c. Information About Multiplex's Operations in Different Industry Segments: Multiplex Operations Industry Segments (in millions) Car Rental Aerospace Communications Health/ Fitness Heavy Equip.

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, plant and equipment) Unallocated corporate assets Consolidated total $472 (15) ( 7)

25 $475

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

P13-23

Reporting Operations in Different Industries

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. $426,000,000 / $856,000,000 = 49.8% Long-lived assets: Long-lived, productive assets of foreign operations total $370,000,000. $370,000,000 / $750,000,000 = 49.3%

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 Unaffiliated Customers $430,000,000 300,000,000 36,000,000 90,000,000 $856,000.000

Geographic Area Domestic France Mexico Japan Total

Percent of Consolidated Revenue of $856,000,000 50.2% 35.0% 4.2% 10.5%

Separately Reportable Yes Yes No Yes

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

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

P13-23

(continued)

The long-lived, productive assets test is shown below: Watson Inc. Assets Test Applied to Individual Foreign Operations For the Year Ended December 31, 20X5 Percent of Total Long-Lived Assets of $505,000,000 46.5% 31.7% 5.7% 16.0%

Geographic Area Domestic France Mexico Japan Consolidated

Assets $235,000,000 160,000,000 29,000,000 81,000,000 $505,000,000

Separately Reportable Yes Yes No Yes

The company will disclose the long-lived assets in France and Japan. Watson Inc. 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, Inc., 1999

P13-24 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Matching Key Terms L R D O A F I K M C N H Q S

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

(Page Intentionally Left Blank)

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

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

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