solusi manual advanced acc zy Chap013

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solusi manual advanced acc zy Chap013

  1. 1. 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 decisionmaking 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. 13-1
  2. 2. Chapter 13 - Segment and Interim Reporting 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 endof-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. 13-2
  3. 3. Chapter 13 - Segment and Interim Reporting 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-todate 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. 13-3
  4. 4. Chapter 13 - Segment and Interim Reporting 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). 13-4
  5. 5. Chapter 13 - Segment and Interim Reporting 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. 13-5
  6. 6. Chapter 13 - Segment and Interim Reporting 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 Revenue Profit Assets Reportabl e 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 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. 13-6
  7. 7. Chapter 13 - Segment and Interim Reporting 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. 13-7
  8. 8. Chapter 13 - Segment and Interim Reporting 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. 13-8
  9. 9. Chapter 13 - Segment and Interim Reporting 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* 13-9
  10. 10. Chapter 13 - Segment and Interim Reporting 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 13-10
  11. 11. Chapter 13 - Segment and Interim Reporting 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 13-11
  12. 12. Chapter 13 - Segment and Interim Reporting 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 No Yes No Yes Yes No Yes No Yes No Yes Yes Yes Yes No Yes No Yes Yes No Yes Electronics Bicycles Sporting Goods Home Appliances Gas and Oil Glassware Hardware 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 Total revenue from unaffiliated customers Yes, the 75 percent test is met. 13-12 = $655,000 = 87.3% $750,000
  13. 13. Chapter 13 - Segment and Interim Reporting E13-2 Multiple-Choice Questions on Segment Reporting [AICPA Adapted] 1. b 2. a $ 750,000 (325,000) (90,000) $ 335,000 d 3. Sales Traceable operating expenses Indirect operating expenses (3/4 x $120,000) Operating profit Sales ($1,800,000 x .60) Traceable costs Income before common costs Cost allocated [($480,000 / $600,000) x $350,000] Operating profit 4. c Sales Traceable costs Income before allocable costs Cost allocated [($60,000 / $300,000) x $150,000] Operating profit 5. 20X6 Total $1,800,000 (1,200,000) $ 600,000 (280,000) $ 200,000 Segment B $ 300,000 (240,000) $ 60,000 $ Total $ 900,000 (600,000) $ 300,000 (30,000) 30,000 c 6. Segment 3 $1,080,000 (600,000) $ 480,000 a Sales Traceable costs Allocated costs [($400,000 / $1,000,000) x $500,000] Operating profit 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 13-13 $ 150,000 200,000 $ 400,000 $ (350,000) 50,000
  14. 14. Chapter 13 - Segment and Interim Reporting 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. 13-14
  15. 15. Chapter 13 - Segment and Interim Reporting E13-4 Temporary LIFO Liquidation Case a: Partial replacement of LIFO base by year-end. (1) Cost of Goods Sold Inventory Excess of Replacement Cost over LIFO Cost of Inventory Liquidation 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) 30,420 22,320 8,100 (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 Excess of Replacement Cost over LIFO Cost of Inventory Liquidation Cost of Goods Sold Accounts Payable 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 Inventory Excess of Replacement Cost over LIFO Cost of Inventory Liquidation 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 Cost of Goods Sold Eliminate remaining balance in LIFO valuation account because company did not replace LIFO inventory sold in July. 13-15 16,200 8,100 3,600 25,020 27,900 22,320 2,700 2,700 2,700
  16. 16. Chapter 13 - Segment and Interim Reporting E13-5 Inventory Write-Down and Recovery Case a: Market reductions assumed permanent. Cost of Units Sold Quarter +/- Inventory Adjustment to Market = Cost of Goods Sold I $340,000 (400 x $850) $850 is unit cost from 20X0 + $8,500 (1,700 x $5) write down to $840 = $348,500 II $253,500 (300 x $845) - $7,000 (1,400 x $5) recovery to $850 original cost = 246,500 III $85,000 (100 x $850) + $26,000 (1,300 x $20) write down to $830 = 111,000 IV $332,000 (400 x $830) - $9,000 (900 x $10) recovery to $840 = 323,000 $9,000 (900 x $10) write down from $850 to $840 = Total Annual basis: $1,020,000 (1,200 x $850) + $1,029,000 $1,029,000 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. 13-16
  17. 17. Chapter 13 - Segment and Interim Reporting 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 Units Sold Quarter +/- Inventory Adjustment to Market = Cost of Goods Sold I $340,000 (400 x $850) $850 is unit cost from 20X0 = $340,000 II $255,000 (300 x $850) = 255,000 III $85,000 (100 x $850) = 85,000 IV $340,000 (400 x $850) $9,000 (900 x $10) write down from $850 to $840 = 349,000 $9,000 (900 x $10) write down from $850 to $840 = + Total Annual basis: $1,020,000 (1,200 x $850) + 13-17 $1,029,000 $1,029,000
  18. 18. 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) Other tax credit Total credits Estimated annual operating loss Tax benefit rate ($50,000 / $100,000) Operating loss in first quarter Tax benefit in first quarter 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. $ 40,000 10,000 $ 50,000 ÷100,000 .50 x$20,000 $ 10,000 E13-7 Significant Foreign Operations Geographic Area U.S. Britain Brazil Israel Australia Consolidated Revenue 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 Note that the country-based revenue test is based on sales to customers. All countries having material sales to unaffiliated customers ($793,000 x .10) or more must be separately reported. Percent of Total LongLong-Lived Lived Assets Geographic Area Assets of $1,182,000 U.S. $ 509,000 43.1% Britain 439,000 37.1 Brazil 93,000 7.9 Israel 66,000 5.6 Australia 75,000 6.3 Total Assets $1,182,000 Separately Reportable Yes Yes No No No unaffiliated of $79,300 Separately Reportable 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. 13-18
  19. 19. 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 Computer software Computer hardware $6,100,000 ($3,900,000 + $2,200,000 under common control) $4,650,000 $5,400,000 E13-9 Estimated Annual Tax Rate a. Estimated Annual Amounts Income from continuing operations Adjustment for permanent differences: Addback: Premiums for life insurance Less: Dividends exclusion Tax-exempt income to be received Estimated annual taxable income from continuing operations Combined tax rate Estimated annual taxes before credits Deduct expected business tax credit Estimated income taxes for year $1,200,000 $ 12,000 (70,000) (20,000) (78,000) $1,122,000 x .40 $ 448,000 (40,000) $ 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.) 13-19
  20. 20. Chapter 13 - Segment and Interim Reporting E13-10 Operating Loss Tax Benefits Period 1 2 3 4 Total Income (Losses) Before Taxes YearPeriod to-Date $(100,000) 80,000 160,000 400,000 $ 540,000 $(100,000) (20,000) 140,000 540,000 Estimated Effective Annual Tax Rate Tax (Benefit) Less Reported YearPreviously In to-Date (a) Provided Period 40% 40% 45% 45% $(40,000) (8,000) 63,000 243,000 -0$(40,000) (8,000) 63,000 $ (40,000) 32,000 71,000 180,000 $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 Revenue Operating Segment Ethical Drugs Nonprescription Drugs Generic Drugs Industrial Chemicals Total b. Percent of Combined Revenue of $1,385 Separately Reportable 23.1% 37.2 33.9 5.8 Yes Yes Yes No Percent of Consolidated Revenue of $1,165 Separately Reportable 70.4% 21.0 8.6 Always Yes* No* $ 320 515 470 80 $1,385 Geographic Area revenue test (in thousands) Unaffiliated Revenue Geographic Area Domestic Mexico Taiwan Total $ 820 245 100 $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) Sales to Unaffiliates Intersegment Revenue Ethical Drugs Nonprescription Generic Drugs Drugs Other Combined $300 $425 $370 $70 $1,165 20 $320 90 $515 100 $470 10 $80 220 $1,385 Eliminations 13-20 Consolidated $1,165 $(220) $(220) $1,165
  21. 21. Chapter 13 - Segment and Interim Reporting P13-11 (continued) 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. 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. 13-21
  22. 22. Chapter 13 - Segment and Interim Reporting 13-13 Segment Reporting Workpaper and Schedules a. (1) A Revenues: Sales to unaffilIated customers Intersegment sales Total revenue Operating costs: Traceable costs Allocateda Segment profit (loss) Other items: General corporate expenses Income from continuing operations Assets: Segment General corporate Total assets a $17,000 $ 6,500 $17,900 $ 3,600 Operating Segments___________ B C D 280,000 60,000 340,000 130,000 Corporate Admin. Combined Intersegment Eliminations (90,000) (90,000) Consolidated 130,000 340,000 18,000 358,000 60,000 12,000 72,000 810,000 90,000 900,000 (245,000) (17,000) (90,000) (6,500) (290,000) (17,900) (82,000) (3,600) (707,000) (45,000) 90,000 (617,000) (45,000) 78,000 33,500 50,100 (13,600) 148,000 -0- 148,000 (20,000) 78,000 33,500 50,100 (13,600) 400,000 105,000 500,000 75,000 400,000 105,000 500,000 75,000 = ($340,000 / = ($130,000 / = ($358,000 / = ($ 72,000 / $900,000) x $45,000 $900,000) x $45,000 $900,000) x $45,000 $900,000) x $45,000 13-22 (20,000) (20,000) 128,000 120,000 120,000 1,080,000 120,000 1,200,000 810,000 810,000 (20,000) -0- 128,000 1,080,000 120,000 1,200,000
  23. 23. Chapter 13 - Segment and Interim Reporting P13-13 (continued) (2) Segments A B C D Revenuea Yes Yes Yes No Segment Profitb Yes Yes Yes No Segment Assetsc Yes No Yes 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 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 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) 13-23
  24. 24. 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 Apparel Revenue: Sales to unaffiliated customers Intersegment sales Total sales Expenses: Cost of goods sold Selling expenses Traceable expenses Allocated general corporate expenses Total segment Expenses Segment profit Unallocated general corporate expenses Income from continuing operations before taxes Assets: Segment General corporate Total assets Operating Segment Building Chemical Furniture 870,000 750,000 870,000 Machinery Corporate Administration Combined Intersegment Eliminations Consolidated (160,000) (160,000) 1,950,000 -01,950,000 750,000 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 (480,000) (160,000) (40,000) (450,000) (40,000) (30,000) (42,000) (10,000) (6,000) (78,000) (20,000) (12,000) (150,000) (30,000) (18,000) (1,200,000) (260,000) (106,000) (80,000) (75,000) (7,000) (13,000) (25,000) (200,000) (760,000) 110,000 (595,000) 155,000 (65,000) (5,000) (123,000) (13,000) (223,000) 97,000 (1,766,000) 344,000 (35,000) 110,000 155,000 (5,000) (13,000) 97,000 610,000 560,000 80,000 90,000 140,000 610,000 560,000 80,000 90,000 140,000 13-24 309,000 125,000 125,000 1,480,000 125,000 1,605,000 (1,040,000) (260,000) (106,000) (200,000) 160,000 -0- (35,000) (35,000) 160,000 (1,606,000) 344,000 (35,000) -0- 309,000 1,480,000 125,000 1,605,000
  25. 25. Chapter 13 - Segment And Interim Reporting P13-14 (continued) b. Separately reportable segments. Apparel Building Chemical Furniture Machinery Segment Profitb Yes Yes No No Yes Revenuea Yes Yes No No Yes Segment Assetsc Yes Yes No No 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 Sales to unaffiliated customers for all segments 13-25 > 75%
  26. 26. Chapter 13 - Segment And Interim Reporting P13-14 (continued) c. Calvin, Inc. Footnote X Information about the Company's Operations in Different Operating Segments Sales to unaffiliated customers Intersegment sales Total revenue Segment profit $870,000 Operating Segments Building Machinery $750,000 $180,000 140,000 $750,000 $320,000 Others $150,000 20,000 $170,000 $110,000 $155,000 $(18,000) Apparel $870,000 $ 97,000 Intersegment Eliminations $(160,000) $(160,000) Unallocated general corp. expenses Income from continuing operations Segment assets Consolidated $1,950,000 -0$1,950,000 $ 344,000 (35,000) $ 309,000 $610,000 $560,000 $140,000 $170,000 General corporate assets Total assets $1,480,000 125,000 $1,605,000 Depreciation expense $ 60,000 $ 50,000 $ 25,000 $ 21,000 $ 156,000 Capital expenditures $ 20,000 $ 30,000 $ 15,000 $ $ Reconciliation of reportable segment revenue to consolidated revenue: Total revenue for reportable segments Other revenues Elimination of intersegment revenues Total consolidated revenues -0- Reconciliation of reportable segment profit and loss to consolidated profit or loss: $1,940,000 Total profit and loss for reportable segments 170,000 Other loss (160,000) General corporate expenses $1,950,000 Income before taxes 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 13-26 65,000 $362,000 (18,000) (35,000) $309,000
  27. 27. Chapter 13 - Segment And Interim Reporting P13-14 (continued) d. Schedule showing three ten percent tests with changes in segment assets: Revenue Segment Profit (Loss) Segment Assets Apparel $ 870,000 = 41.2% $2,110,000 $110,000 = 30.4% $362,000* $ 610,000 = 41.2% $1,480,000 Building $ 750,000 = 35.6% $2,110,000 $155,000 $362,000 = 42.8% $ 460,000 = 31.1% $1,480,000 Chemical $ 60,000 = 2.8% $2,110,000 $ 5,000 $362,000 = 1.4% $ 80,000 = 5.4% $1,480,000 Furniture $ 110,000 = 5.2% $2,110,000 $ 13,000 $362,000 = 3.6% $ 190,000 = 12.8% $1,480,000 Machinery $ 320,000 = 15.2% $2,110,000 $ 97,000 $362,000 = 26.8% $ 140,000 = 9.5% $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: Apparel Building Chemical Furniture Machinery Revenue 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. 13-27
  28. 28. 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 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) = b. 45% 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 a $850,000 (525,000) a $325,000 (185,000) $140,000 (68,000) $ 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 b $420,000 105,000 $525,000 Computation of Income Taxes Interim Period Income (Loss) Before Taxes Current YearPeriod to-date Estimated Effective Annual Tax Rate Yearto-date 1 100,000 100,000 40% 40,000 2 140,000 240,000 45% 108,000 13-28 Tax (Benefit) Less Previously Provided -040,000 Reported in this Period 40,000 68,000
  29. 29. Chapter 13 - Segment And Interim Reporting 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 Less: Dividends received deduction Estimated taxable income Combined taxable rate Estimated tax before credits Less: Business tax credit Estimated income taxes $600,000 (75,000) $525,000 40% $210,000 (15,000) $195,000 Estimated effective annual tax rate ($195,000 / $600,000) = 32.5% 13-29
  30. 30. Chapter 13 - Segment And Interim Reporting P13-16 (continued) b. Malta Corporation Income Statement For Three Months Ended June 30, 20X1 Sales Cost of goods sold: Beginning inventory Purchases Goods available Less: Ending inventory $1,200,000 $ 78,000 650,000 $728,000 (80,000) a $648,000 (4,000) Less: Recovery from LCM Gross profit Operating expense Income before taxes Income taxes Net income a (644,000) $ 556,000 (320,000) $ 236,000 (87,950) $ 148,050 b 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 b Computation of income taxes Income (Loss) Before Taxes Current YearPeriod Period to-date 1 2 c (90,000) 236,000 (90,000) 146,000 Estimated Effective Annual Tax Rate 45.0% 32.5%c See solution to part a. 13-30 Yearto-date Tax (Benefit) Less Previously Provided Reported in This Period (40,500) 47,450 (40,500) (40,500) 87,950
  31. 31. Chapter 13 - Segment And Interim Reporting P13-17 Evaluating Foreign Operations a. Profit or loss for each geographic area: Sales to unaffiliated Interarea sales Total revenues Operating expenses Allocated costs Operating profit (loss) a U.S. $2,500 100 $2,600 1,820 100a $ 680 New Zealand $320 __ $320 290 12.8 $ 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 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 Consolidated sales to unaffiliates = $ 500 = $3,000 16.6% Total foreign assets Total long-lived assets = $ 500 = $2,700 18.5% Revenues and long-lived assets for domestic and total foreign operations must be disclosed. 13-31
  32. 32. Chapter 13 - Segment And Interim Reporting P13-17 (continued) c. Separately reportable foreign segments: Geographic Area Sales to Unaffiliated Customers Percent of Consolidated Revenues of $3,000 Domestic New Zealand Singapore Australia Total $2,500 320 60 120 $3,000 83.3% 10.7 2.0 4.0 100.0% Geographic Area Assets Percent of Total Long-lived Assets of $2,700 Domestic New Zealand Singapore Australia Total $2,200 280 140 80 $2,700 81.4% 10.4 5.2 3.0 100.0% Separately Reportable Yes Yes No No Separately Reportable Yes Yes No No For both of these tests, the New Zealand operations are separately reportable as a significant foreign operation, using a 10 percent materiality threshold. 13-32
  33. 33. Chapter 13 - Segment And Interim Reporting 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: Quarter Ended 20X7: March 31 June 30 September 30 20X6: March 31 June 30 September 30 December 31 Net Sales Gross Profit $388 406 428 $123 123 137 394 416 403 385 Earnings from Operations, Before Tax Net Earnings $106 105 119 $17 18 18 $10.2 10.8 10.8 112 119 117 103 15 19 6 22 9.0 11.4 3.6 13.2 Operating Expenses 127 138 123 125 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. 13-33
  34. 34. Chapter 13 - Segment And Interim Reporting 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 Contract Gross Sales Profit Quarter Ended 20X7: March 31 June 30 September 30 20X6: March 31 June 30 September 30 December 31 Percentage-ofCompletion Gross Sales Profit Effect of Change Gross Sales Profit $ 80 -0100 $20 -050 $60 55 70 $30 30 40 $(20) 55 (30) $10 30 (10) -0150 -060 -0100 -040 60 40 50 50 40 20 30 30 60 (110) 50 (10) 40 (80) 30 (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. Quarter Ended 20X7: March 31 June 30 September 30 20X6: March 31 June 30 September 30 December 31 Net Sales $368 461 398 454 306 453 375 179 71 178 124 Net Earnings $37 60 22 $22.2 36.0 13.2 112 119 117 103 $143 165 141 Earnings from Operations, Before Tax $106 105 119 Gross Profit 67 (48) 61 21 40.2 (28.8) 36.6 12.6 Operating Expenses 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. 13-34
  35. 35. 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 Car Rental Aerospace Communications Health/Fitness Heavy Equipment Total 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 Multiplex Inc. Schedule for the 10% Segment Profit or Loss Test For the Year Ended December 31, 20X5 (in millions) Segment Percent of Test Segment Profit (loss) Amount of $105 million Car Rental $ 17 16.2% Aerospace 6 5.7 Communications 18 17.1 Health/Fitness 20 19.0 Heavy Equipment 44 41.9 Total $105 Reportable Segment No Yes No No Yes Reportable Segment Yes No Yes Yes Yes Determination of the profit of each operating segment (in $millions) Revenue Cost of goods sold Selling expenses Other traceable expenses Allocation of common costs Operating profit Car Rental $ 39 (16) Aerospace $ 204 (141) (42) Communications $ 60 Health/ Fitness $ 50 (29) (23) Heavy Equipment $ 275 (177) (37) (4) (8) (11) (5) (10) (2) (7) (2) (2) (7) 6 $ 18 $ 20 $ 44 $ 17 $ Total profits (in $millions) amount to $105: ($17 + $6 + $18 + $20 + $44). 13-35
  36. 36. 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) Operating Segment Car Rental Aerospace Communications Health/Fitness Heavy Equipment Total Percent of Test Amount of $472 million 4.2% 22.7 14.8 16.9 41.3 Segment Assets $ 20 107 70 80 195 $472 Reportable Segment No Yes Yes Yes Yes Multiplex Inc. Schedule of Reportable Segments For the Year Ended December 31, 20X5 Segment Car Rental Aerospace Communications Health/Fitness Heavy Equipment b. Revenue Test No Yes No No Yes Profit Test Yes No Yes Yes Yes Assets Test No Yes Yes Yes Yes Segment Yes Yes Yes Yes Yes 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. 13-36
  37. 37. 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) Item Sales to: unaffiliated customers Intersegment sales Total revenue Depreciation Segment profit Segment assets Expenditures for segment assets Car Rental Aerospace CommuniCations Health/ Fitness $34 5 $39 $204 $60 $50 $204 $60 $ 4 17 20 $ 15 6 107 $ 4 18 70 3 30 Heavy Equip. $50 $250 25 $275 $598 30 $628 $ 5 20 80 $ 25 44 195 $ 53 105 472 15 40 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 13-37 Combined $472 (15) ( 7) 25 $475
  38. 38. 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 Geographic Area Domestic France Mexico Japan Total Sales to Unaffiliated Customers $430,000,000 300,000,000 36,000,000 90,000,000 $856,000,000 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. 13-38
  39. 39. 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 Geographic Area Domestic France Mexico Japan Consolidated Long-Lived, Productive Assets $235,000,000 160,000,000 29,000,000 81,000,000 $505,000,000 Percent of Total Long-Lived Assets of $505,000,000 46.5% 31.7 5.7 16.0 Separately Reportable Yes Yes No Yes 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) United States France Japan Other Revenue $430 300 90 36 $856 13-39 Long-Lived Assets $235 160 81 29 $505
  40. 40. 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 13-40

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