Solution manual advanced accounting 10e by fischer taylor CH12

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 12 UNDERSTANDING THE ISSUES back period and any “more likely than not” pretax income in the carryforward periods If the pretax income in these periods were not sufficient to absorb the remaining pretax loss, then some of the third-quarter pretax loss would not recognize a benefit In order to fully recognize the benefit associated with an interim period pretax loss, there must be some combination of the following: sufficient pretax income in other quarters of the current year, sufficient pretax income in the carryback period, and/or sufficient “more likely than not” pretax income in the carryforward period Viewing an interim period as an integral part of a larger annual period has several benefits The allocation of expense under this viewpoint provides information that allows for more meaningful and insightful predictions of annual results Furthermore, the effect of certain interim conditions that are not expected to exist at year-end may be given special accounting treatment Examples of this include special accounting for temporary inventory liquidations and temporary unfavorable variances If special accounting treatment were not available, projections of annual amounts would be distorted There are a number of reasons why the total operating profit of the reportable segments does not normally equal the consolidated operating profit First of all, not all operating segments are reportable and yet such amounts are included in consolidated amounts Second, there are a number of intersegment transactions whose effect would be included in operating profits of reportable segments but eliminated from consolidated amounts Third, not all elements of consolidated income are allocated to reportable segments This is traceable to the fact that not all elements are used by the chief operating decision maker in evaluating segment performance and/or because allocation is not possible on a reasonable basis Finally, the accounting employed from a management approach perspective may be different from the requirement to use GAAP in the measurement of consolidated amounts A number of factors are necessary in order to determine the estimated effective annual tax rate First of all, the rate should reflect conditions to be experienced for the entire year Therefore, in addition to year-to-date pretax income/loss, such amounts must be projected for the balance of the year Statutory tax rates are applied to these annual amounts after considering the presence of possible annual permanent differences between book and tax income The resulting taxes must also be reduced by possible tax credits The applicability of the above factors becomes more complex in situations where there is an estimated annual pretax loss This situation requires the consideration of possible tax loss and/or tax credit carrybacks and carryforwards Several factors may explain this situation If the third-quarter loss were greater than the pretax income in the first two quarters plus the forecasted pretax income for the fourth quarter, then some of the benefit traceable to the loss may not be recognized However, if this were the case, one would consider any known pretax income in the carry- 559 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises EXERCISES EXERCISE 12-1 (1) Wert Company Income Statement For 3-Month Period Ended June 30, 20X2 Sales Cost of goods sold: Standard cost of goods manufactured Add finished goods inventory, April 1, 20X2, at standard cost Deduct finished goods inventory, June 30, 20X2, at standard cost Cost of goods sold at standard cost Add net unfavorable cost variances Adjusted cost of goods sold Gross profit Selling and administrative expenses: Selling expenses General and administrative expenses Net income $860,000 $600,000 71,000 (98,000) $573,000 1,700* 574,700 $285,300 $ 68,000 117,000 185,000 $100,300 *Purchase price variances or volume or capacity cost variances that are planned and expected to be absorbed by the end of the annual period should ordinarily be deferred at interim reporting dates Therefore, the net unfavorable cost variance recognized is $1,700 ($2,600 – $900) (2) Wert Company Income Statement For 3-Month Period Ended June 30, 20X2 Sales Cost of goods sold Gross profit Selling and administrative expenses: Selling expenses General and administrative expenses Net income $860,000 648,000** $212,000 $ 68,000 117,000 $ 185,000 27,000 **$596,000 + [13,000 units × ($11 – $7)] = $648,000 Inventory at the interim reporting date should not give effect to the LIFO liquidation, and the cost of goods sold should include the expected cost of replacement of the liquidated LIFO base Since it is expected that 2,000 units of beginning inventory will be part of the 20X2 cost of goods sold, only 13,000 units need to be adjusted 560 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises Exercise 12-1 Concluded (3) Wert Company Income Statement For 3-Month Period Ended June 30, 20X2 Sales Cost of goods sold Gross profit Selling and administrative expenses: Selling expenses General and administrative expenses Net income $860,000 493,300‡ $366,700 $ 68,000 117,000 185,000 $181,700 ‡ Recoveries of inventory losses from market declines in earlier interim periods of the same fiscal year should be recognized as gains; such gains should not exceed previously recognized losses Cost of goods sold: Inventory, April 1, 20X2 Purchases (18,000 × $28) Inventory, June 30, 20X2 Write-up to offset first-quarter write-down Cost of goods sold $ 52,000 504,000 (60,500) $495,500 (2,200) $493,300 EXERCISE 12-2 (1) Although research and development (R&D) costs are generally expensed in the year in which such costs are incurred, the question at hand is how they should be treated for interim reporting purposes Because an interim period is considered to be an integral part of a larger annual period, interim data are viewed as a possible predictor of annual values Therefore, the R&D recognized in a given interim period might become the basis for estimating an annual amount If all the R&D were expensed in a single quarter, one might suggest that annual R&D is four times that amount In order to avoid this incorrect conclusion, the R&D should be amortized over the current and remaining quarters within the annual period In this specific case, the $130,000 of costs should be allocated to each of the four quarters in the amount of $32,500 per quarter 561 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises Exercise 12-2, Concluded (2) In interim reporting, the year-to-date (YTD) tax expense represents the best estimate of the annual estimated effective tax rate The YTD tax expense is allocated to the current and prior quarters If the estimated effective tax rate has been revised from a previous estimate, this change in estimate is recognized in the new YTD values and also in the current quarter’s tax expense Therefore, a given quarter’s tax expense reflects the tax on the quarter’s income and the effect of a rate change on previous quarters To illustrate, assume the following: Quarter Current YTD Income Income $50,000 $ 50,0 70,000 120,000 Tax Rate 30% 35 YTD Tax Expense $15,000 42,000 Current Tax Expense $15,000 27,000 The tax expense in quarter reflects the tax on $70,000 at 35%, or $24,500, and the 5% increase in taxes traceable to quarter 1, or $50,000 at 5%, or $2,500 The total current tax expense of $27,000 for quarter is approximately 39% (versus the effective rate of 35%) of the second-quarter income EXERCISE 12-3 Granger Supply, Inc Interim Income Statements For the Periods Ending Quarter and 2, 20X7 Net sales Cost of sales (See Schedule A) Gross profit Selling, general, and administrative Income before taxes Income tax expense (See Schedule B) Net income Quarter Quarter $12,000,000 $9,000,000 7,900,000 7,805,0 $ 4,100,000 $1,195,000 2,100,000 1,800,0 $ 2,000,000 $ (605,00 700,800 (217,15 $ 1,299,200 $ (387,84 Schedule A—Cost of Sales Quarter As stated: Cost of sales—industrial supplies Cost of sales—cleaning equipment Adjustment for replacement cost: 400 units × ($2,700 – $1,500) Adjustment for loss due to market decline New cost of sales 562 Quarter $4,300,000 3,000,000 $4,700,000 3,200,0 480,000 120,000 $7,900,000 (95,000 $7,805,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises Exercise 12-3, Concluded Schedule B—Income Tax Schedule YTD income before tax Projected income Estimated annual income Permanent differences Estimated adjusted taxable income Statutory tax rate Tax on estimated adjusted taxable income Tax credits Net tax Effective tax rate Interim Period First Second Ordinary Pretax Income (Loss) Current Effective Tax Period Year-to-Date Rate $2,000,000 $2,000,00035.04% (605,000) 1,395,00034.67 Quarter Quarter $2,000,000 $1,395,000 5,100,000 4,000,000 $7,100,000 $5,395,000 60,000 35,000 $7,160,000 $5,430,000 35.00% 35.00% $2,506,000 18,000 $2,488,000 35.04% 34.67% Tax Expense (Benefit) Previously Current Year-to-Date Reported Period $700,800 $ — $ 700,800 483,646 700,800 (217,154) EXERCISE 12-4 (1) YTD income (loss) Projected income (loss) Total annual Less exempt income Taxable income Estimated tax: On first $50,000 @ 10% On next $50,000 @ 20% On next $50,000 @ 30% On next $50,000 @ 40% Remaining income @ 35% Before After Change Change $100,000 $120,000 110,000 135,000 $210,000 255,000 (5,000) (5,000) $205,000 $250,000 Less tax credit Net tax Effective tax rate 5,000 $ 5,000 10,000 10,000 15,000 15,000 20,000 20,000 1,750 17,500 $ 51,750 $ 67,500 (8,000) (8,000) $ 43,750 $ 59,500 20.83% 23.33% First months’ tax expense (benefit): Pretax income (loss) Effective tax rate per above Tax expense (benefit) $100,000 $120,000 × 20.83% × 23.33% $ 20,833 $ 27,996 $ The change in accounting principle resulted in an increase in tax expense for the first months of $7,163 ($27,996 vs $20,833) 563 $1,900,500 30,000 $1,870,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises Exercise 12-4, Concluded (2) First months continuing Third quarter continuing Projected continuing Nonordinary loss Nonordinary gain Pretax income (loss) Tax expense (benefit) 35,400 Total Total Excluding Excluding Ordinary Total Nonordinary Nonordinary Income Income Loss Gain $120,000 $120,000 $120,000 $120,000 80,000 80,000 80,000 80,000 20,000 20,000 20,000 20,000 (40,000) (40,000) 60,000 60,000 $220,000 $240,000 $280,000 $180,000 $ 50,600 $ Incremental tax expense (benefit) traceable to: All nonordinary items ($57,600 – $50,600) All nonordinary losses ($71,600 – $57,600) All nonordinary gains [$7,000 – ($14,000)] Taxable income: Pretax accounting income Less exempt income (4,000) Taxable income Estimated tax: On first $50,000 @ 10% 5,000 On next $50,000 @ 20% On next $50,000 @ 30% On next $50,000 @ 40% Remaining income @ 35% — $240,000 $216,000 $236,000 $ 5,000 10,000 15,000 20,000 5,600 $ 40,400 Less tax credit (5,000) Net tax 35,400 $220,000 (4,000) 55,600 $ 10,000 15,000 20,000 $ (5,000) $ 50,600 564 $ 57,600 $ $ $ $ 71,600 $ 7,000 (14,000) 21,000 $280,000 $180,000 (4,000) (4,000) $276,000 5,000 $ $176,000 5,000 $ 10,000 10,000 15,000 15,000 20,000 10,400 12,600 26,600 62,600 $ 76,600 $ (5,000) (5,000) 57,600 $ 71,600 $ To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises EXERCISE 12-5 Corporation A YTD realized income (loss) Projected income (loss) Total income (loss) Income adjustments Total taxable income (loss) Statutory tax rate Tax expense (benefit) Tax credit Net tax expense (benefit) $ × $ $ 95,000 30,000 $125,000 $125,000 40% 50,000 (2,000) 48,000 $ × Corporation C Corporation D 5,000 $ (70,000) $(65,000) (7,000)* $(72,000) 40% × $(28,800) $ (3,500) $(32,300) $ $(14,400)b $ Limit to tax benefits Effective annual tax rate Corporation B 38.4%a 22.2%b (80,000) $ 20,000 (50,000) (35,000) $(130,000) $(15,000) 2,000 $(128,000) $(15,000) 40% × 40% (51,200) $( 6,000) (1,000) (51,200) $ (7,000) (38,860)c $ 29.9%c (5,000)d 33.3%d *$15,000 text exempt municipal income—$8,000 deductions not allowed a $48,000 ÷ $125,000 = 38.4% $14,400 ÷ $65,000 = 22.2% The tax benefit is traceable to carrying back $32,000 at 30% to 20X1 and $15,000 at 32% to 20X2 c $38,860 ÷ $130,000 = 29.9% The prior two years’ income totals $140,000, of which $128,000 may be offset by the NOL carryback, resulting in a tax benefit of $38,860 [($105,000 ì 30%) + ($23,000 ì 32%)] d $5,000 ữ $15,000 = 33.3% b Tax benefit limited to projected carryforward ($12,500 × 40%) 565 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises EXERCISE 12-6 Quarter Quarter YTD pretax income (loss) Projected pretax income (loss) Estimated annual income Permanent differences Estimated adjusted income Originally Stated $ 800,000 1,100,000 $1,900,000 — $1,900,000 Continuing $1,020,000 1,420,000 $2,440,000 — $2,440,000 Statutory tax: At 30% rate on first $1,500,000 At 35% rate thereafter Total statutory tax Tax credits Net tax $ 450,000 140,000 $ 590,000 29,500 $ 560,500 $ 450,000 329,000 $ 779,000 29,500 $ 749,500 $ 450,000 383,250 $ 833,250 15,000 $ 818,250 Effective tax rate 29.50% 30.72% 31.53% Interim Quarter First First—Restated First—Restated Second Second Type of Income Continuing Op Continuing Op Discontinued Continuing Op Discontinued Discontinued $(220,000) (320,000) $(540,000) $(540,000) Pretax Income (Loss) Current Effective Period Year-to-Date Tax Rate $ 800,000 $ 800,000 29.50% 1,020,000 1,020,00030.72% (220,000) (220,000) Note A 525,000 1,545,00031.53% (480,000) (700,000) Note B Continuing $1,545,000 1,050,000 $2,595,000 — $2,595,000 Discontinued $(700,000) — $(700,000) $(700,000) Tax Expense (Benefit) Previously Current Year-to-Date Reported Period $ 236,000 $ — $ 236,000 313,344 — 313,344 (77,344) — (77,344) 487,139 313,344 173,795 (245,000) (77,344) (167,656) Note A: The difference between the first and first restated continuing operations is the tax benefit attributed to the discontinued operations Note B: Annual income (loss) Annual net tax expense (benefit) Continuing Operations $2,595,000 818,250 All Sources $1,895,000 573,250 [(30% × $1,500,000) + (35% × $395,000) – $15,000] The difference between $818,250 and $573,250 represents the tax benefit associated with the discontinued operation 566 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises EXERCISE 12-7 First-quarter income (loss) Second-quarter income (loss) YTD income (loss) Projected income (loss) Total annual Estimated tax benefit: Carryback to 20X5: On first $50,000 @ 15% On next $25,000 @ 25% On next $25,000 @ 34% Carryback to 20X6: On first $50,000 @ 15% On next $25,000 @ 25% Total tax benefit Estimated rate of benefit Quarter tax expense (benefit): YTD pretax income (loss) Effective tax rate per above YTD tax expense (benefit) Prior quarter expense (benefit) Current quarter expense (benefit) Quarter 1, 20X7 Quarter 2, 20X7 Before After Before After Change Change Change Change $ 40,000 $ 70,000 $ 40,000 $ — — (30,000) $ 40,000 $ 70,000 $ 10,000 $ (155,000) (150,000) (210,000) $(170,000) $ (85,000) $(140,000) $ $ 7,500 $ 6,250 8,500 7,500 2,500 $32,250 18.97% $ 40,000 × 18.97% $ 7,588 — $ 7,588 567 7,500 $ 6,250 3,400 — — $17,150 20.18% $ 70,000 × 20.18% $ 14,126 — $ 14,126 7,500 $ 6,250 8,500 6,000 — $28,250 20.18% 7,500 5,000 — — — $12,500 17.86% $ 10,000 $ 60,000 × 20.18% × 17.86% $ 2,018 $ 10,716 7,588 14,126 $ (5,570) $ (3,410) 70,000 (10,000 60,000 (130,00 (70,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Exercises EXERCISE 12-8 Continuing income (loss) 60,000 Nonordinary item A Nonordinary item B Nonordinary item C Pretax income (loss) 30,000 Tax expense (benefit) 4,500 Estimated tax: On first $50,000 @ 15% On next $25,000 @ 25% On next $25,000 @ 34% Total estimated tax Ordinary Total Income Income $60,000 $ — — — $60,000 $10,000 $ 7,500 $ 2,500 — $10,000 Total Total Excluding Excluding Nonordinary Nonordinary Loss (A) Gain (B & C) 60,000 $60,000$ (30,000) 25,000 5,000 $ $ 7,500 $ 2,500 — $10,000 Incremental tax expense (benefit) traceable to: All nonordinary items ($10,000 – $10,000) All nonordinary losses ($10,000 – $18,850) All nonordinary gains [$0 – ($8,850)] Continuing income (loss) 60,000 Nonordinary item A Nonordinary item B Nonordinary item C — Pretax income (loss) 55,000 Tax expense (benefit) 8,750 Calculation of tax expense (benefit): On first $50,000 @ 15% On next $25,000 @ 25% Total estimated tax Ordinary Total Income Income $60,000 $ — — — $ $ $ — 25,000 5,000 60,000 (30,000) — — $90,000$ 10,000 $18,850$ 7,500 6,250 5,100 $18,850 (8,850) 8,850 Total Excluding Item B 60,000 $ (30,000) 25,000 5,000 $4,500 — — $4,500 (30,000) — Total Excluding Item C 60,000 $ (30,000) 25,000 5,000 $60,000 $ 60,000 $ 35,000 $ $10,000 $ 10,000 $ 5,250 $ 7,500 $ 2,500 $10,000 Incremental tax expense (benefit) traceable to: Item B ($10,000 – $5,250) Item C ($10,000 – $8,750) Total 568 7,500 2,500 $10,000 $4,750 1,250 $6,000 $5,250 — $5,250 Percent of Total 79.2% 20.8 100.0% $7,500 1,250 $8,750 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-5, Continued (2) Case B—Calculation of Original Tax Expense Year-to-date income (loss) Projected income (loss) Total income (loss) Tax exempt income Taxable income (loss) $30,000 20,000 $50,000 (6,000) $44,000 Tax expense (benefit): Tax ($44,000 × 30%) Tax credit Net tax $13,200 (6,200) $ 7,000 Estimated rate of tax ($7,000 ÷ $50,000) 14% Original tax expense was $4,200 ($30,000 × 14%) Case B—Calculation of Revised Tax Expense Year-to-date income (loss) Projected income (loss) Total income (loss) Tax exempt income Taxable income (loss) Tax expense (benefit): Tax ($135,000 × 30%) Tax credit Net tax $ 50,000 90,000 $140,000 (5,000) $135,000 $ 40,500 (5,500) 35,000 $ Estimated rate of tax ($35,000 ÷ $140,000) 25% Revised tax expense is $12,500 ($50,000 × 25%) Therefore, the amount traceable to the discontinued operation is an $8,300 tax benefit calculated as follows: Original tax expense on ordinary income $ Restated tax expense on ordinary income Tax benefit traceable to discontinued operation Total restated tax expense $12,500 (8,300) $ 4,200 584 4,200 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-5, Concluded (3) Case C—Calculation of Incremental Tax Impact Pretax income (loss) Tax expense (benefit) Total Income Ordinary Total (Loss) Excluding Income Income Nonordinary (Loss) (Loss) Losses $60,000 $(10,000) $60,000 14,000a (5,000)b 14,000 a $60,000 × 30% less $4,000 tax credit ($10,000) carryback at 25% plus tax credit carryback of $2,500 (to eliminate remaining tax in prior year) b Incremental tax expense (benefit) traceable to: All nonordinary items [($5,000) – $14,000] All nonordinary losses $(19,000) (19,000) Case C—Calculation of Incremental Tax Expense Traceable to Each Individual Loss Category Total Income Total Income Total (Loss) Excluding (Loss) Excluding Income Extraordinary Extraordinary (Loss) Item A Item B $(10,000) $40,000 $10,000 (5,000) 8,000c (1,000)d Pretax income (loss) Tax expense (benefit) c $40,000 × 30% less tax credit of $4,000 $10,000 × 30% less tax credit of $3,000 less tax credit of $1,000 carried back to prior year d Incremental tax expense (benefit) traceable to: All nonordinary losses Nonordinary loss—extraordinary item [($5,000) – $8,000] Nonordinary loss—extraordinary item [($5,000) – ($1,000)] $(19,000) (13,000) (4,000) Case C—Apportionment of Tax Expense Traceable to Nonordinary Losses Nonordinary loss—extraordinary item Nonordinary loss—extraordinary item 585 Incremental Tax Benefit Percent $(13,000) 76.47% (4,000) 23.53 $(17,000)100.00% Apportioned Amount $(14,529) (4,471) $(19,000) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems PROBLEM 12-6 Treetop Corporation Income Statement For the Second Quarter of the Current Fiscal Year Sale revenue Cost of sales (see Schedule A) Gross profit Selling and administrative expenses: Other items Research and development ($75,000/3 quarters) Management bonuses ($160,000/4 quarters) Income before taxes from continuing operations Income taxes (see Schedule B) Net income from continuing operations Extraordinary items (see Schedule C): Extraordinary gain (less tax of $5,523) Extraordinary gain (less tax of $4,406) Net income $510,000 261,900 $248,100 $110,000 25,000 40,000 $ Schedule B—Estimated Tax on Pretax Income from Continuing Operations (PICO) Quarter PICO Quarter PICO Projected balance of year Total annual PICO Tax on annual PICO ($50,000 @ 15% + $3,100 @ 25% = $8,275 less $7,000 credit)…… Estimated effective annual tax rate ($1,275 divided by $53,100) YTD PICO ($93,100 × 2.4%*) Less prior quarter taxes Tax expense traceable to current quarter 586 $ 25,071 96,937 14,477 10,594 Schedule A—Cost of Sales Purchases (1,500 units @ $120 per unit) Prior inventory (600 units @ $100 per unit) Excess replacement cost (600 units @ $24 per unit) Subtotal Inventory shrinkage ($30,000/4 quarters) Total cost of sales *$1,275/$53,100 = 2.4% $ 175,000 73,100 1,234 71,866 $ $180,000 60,000 14,400 $254,400 7,500 $261,900 $ 20,000 73,100 (40,000) $ 53,100 $ $ $ 1,275 2.4% 2,234 (1,000) 1,234 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-6, Concluded Schedule C—Tax Effect of Extraordinary Items Pretax income Tax expense Ordinary Total Total Income Income Income Excluding Gain A $53,100 $88,100* $68,100 1,275 11,204 5,025 Total Income Excluding Gain B $73,100 6,275 *$53,100 + $20,000 + $15,000 Tax expense calculations: Ordinary income: $50,000 @ 15% + $3,100 @ 25% = $8,275 – $7,000 credit Total income: $50,000 @ 15% + $25,000 @ 25% + $13,100 @ 34% = $18,204 – $7,000 Total income excluding gain A: $50,000 @ 15% + $18,100 @ 25% = $12,025 – $7,000 Total income excluding gain B: $50,000 @ 15% + $23,100 @ 25% = $13,275 – $7,000 Income tax traceable to: All extraordinary items ($11,204 – $1,275) Extraordinary gain A ($11,204 – $5,025) Extraordinary gain B ($11,204 – $6,275) $9,929 6,179 4,929 Allocation of total tax traceable to extraordinary items: Extraordinary gain A {[$6,179 ÷ ($6,179 + $4,929)] × $9,929} Extraordinary gain B ($9,929 – $5,523) $5,523 4,406 PROBLEM 12-7 The identification of a segment is based on a “management approach,” which focuses on how management organizes information about business components for purposes of making management decisions and assessing performance In this particular case, the distribution of the products must be viewed as a single operating segment based on the management approach This may be explained by a number of factors such as common distribution channels, marketing, retail sales stores (example: large grocery stores), and sales area Revenues traceable to segments generally not agree to consolidated amounts for several reasons First, segmental revenues include intersegment sales or revenues that are eliminated for the purpose of determining consolidated revenues It is also possible that certain components of revenue are traceable to corporate-level activities (example: rental income) and are therefore not allocated to operating segments 587 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-7, Concluded Public companies are required to disclose segmental data; therefore, such information is publicly available to a wide variety of parties including one’s competitors Obviously, the more information that is publicly available allows competitors to have increased insight into how a company operates and its respective performance Therefore, from a competitive standpoint, it would be better to have fewer segments that are broadly defined rather than many narrowly defined segments that disclose more information For example, consider a company that manufactures automobile batteries and automobile interior seating If these two products were combined into a single segment per the management approach, it would be harder for a competing manufacturer of automobile batteries to know how much of revenues, capital expenditures, and other required segmental disclosures are traceable to just the automobile battery component The determination as to whether or not a segment is considered reportable is based on several mutually exclusive criteria In addition to considering reported revenues, reported profits or losses and/or asset totals may be used as a basis for determining whether or not a segment is reportable Interest expense on corporate bonds payable may be allocated to segments if such information is considered by the chief operating decision maker of an enterprise for purposes of decision making and performance evaluation related to a particular segment However, it would typically seem more likely that such interest expense would not be allocated to a particular segment unless the capital provided by the bond proceeds could be directly allocated to a particular segment It is highly likely that interest expense on corporate bonds would be considered as part of the corporate-level profit or loss Once again, it is important to remember that segmental net sales would include intersegment net sales that are eliminated for purposes of reporting consolidated company-wide net sales Therefore, if there are intersegment sales, it is likely that the total of segmental net sales will exceed net sales for the entire company The statement of cash flows reports cash flows from operations, investing, and financing Certainly some, but not all, of the key information necessary to determine cash flows can be derived from segmental reports For example, depreciation expense for a segment could be added back to the segment’s net profit or loss to give a rough measure of cash flows from operations Obviously, changes in net working capital are not available to complete a measure of cash flows from operations Information about a segment’s capital expenditures would provide important information regarding investing cash outflows A complete measure of a segment’s cash flows cannot be derived from segmental reports; however, rough measures of certain areas of cash flow are possible It would seem that the most difficult area to measure would be cash flows from financing in that the activities impacting these cash flows are not typically allocated to reportable segments 588 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems PROBLEM 12-8 (1) Determination of whether segments are reportable: Segment Semiconductors Control Devices Educational and Productivity Solutions Financing Activities Total Revenues Reported External Intersegment Total Profit (Loss) Assets $19,920,000 $ 3,970,000 $ 23,890,000$ 90,000 $28,220 61,700,000 11,411,000 73,111,000 44,689,000 36,320,000 5,360,000 3,300,000 $90,280,000 5,360,000 (107,000) 6,750,000 964,000 4,264,000 (3,698,000) 6,015,0 $16,345,000 $106,625,000 $40,974,000 $77,305,000 Total of all reported profits Total of all reported losses $44,779,000 (3,805,000) Is Segment's Semiconductors Control Devices Educational and Productivity Solutions Financing Activities Absolute Value Revenue 10% or More of $106,625,000? Yes Yes No No of Profit or Loss 10% or More of $44,779,000? No Yes No No Consolidated revenue Percentage requirement Dollar requirement × External revenue of all reportable segments Conclusion: The reportable segments represent a significant portion of the enterprise 589 Assets 10% or More of $77,305,000? Yes Yes No No $98,568,000 75% $73,926,000 $81,620,000 Is Segment Reportable? Yes Yes No No To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-8, Continued (2) Presentation of segmental values: Reportable Segments Semiconductors Control Devices Revenues from: External customers Intersegment sales Total revenues Segment profit (loss) Segment assets $19,920,000 3,970,000 $23,890,000 $ 90,000 $44,689,000 $28,220,000 Reconciliation to Consolidated Revenue and Profit: Revenues Total revenues for reportable segments Revenues for nonreportable segments Elimination of intersegment revenue Corporate-level revenues Total consolidated revenues Profit or loss Total profit or loss for reportable segments Profit or loss of nonreportable segments Elimination of intercompany profit Corporate-level: Revenues Expenses Total consolidated pretax income Assets Total assets for reportable segments Assets of nonreportable segments Elimination of intersegment assets related to intersegment sales Corporate-level assets Total consolidated assets $ $ $ $ $ $ $61,700,000 11,411, $73,111,000 $36,320,000 97,001,000 9,624,000 (16,345,000) 8,288,000 98,568,000 44,779,000 (3,805,000) (700,000)* 8,288,000 (7,020,000) 41,542,000 64,540,000 12,765,000 (700,000)* 23,000,000 99,605,000 *This represents the intercompany profit on the inventory sold by the Control Devices segment 590 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-8, Continued Business Segment and Geographical Area Data The company presented manufactures, develops, and sells a diverse range of electronic equipment and parts Its primary targets are consumer and industrial markets The company's control device manufacturing is the company's strongest line and together with its semiconductor technology is rapidly expanding into the global market The company presented has four predominate businesses: Semiconductors, Control Devices, Educational and Productivity Solutions, and Financing Activities They are all business segments and are presented in this report The Semiconductors segment uses innovative technology to produce semiconductor chips The chips are sold mainly to equipment engineers and manufacturers The Semiconductors segment will also customize semiconductor chips to suit customer specifications The Control Devices segment consists mainly of electrical control devices The control device customer base is primarily equipment engineers and manufacturers Control devices are also custom-ordered to suit a manufacturer’s or engineer's specific needs Educational and Productivity Solutions produce educational and time-efficient devices The products are sold primarily through retailers and over the Internet The company's Financing Activities segment holds a diversified portfolio of investments It also holds several royalty and licensing agreements with operating segments in several different countries Business Segment Revenues (Including Intersegment)** Semiconductors Control Devices Educational and Productivity Solutions Financing Activities Total Revenues External Intersegment $19,920,000 $ 3,970,0 61,700,000 11,411,000 5,360,000 3,300,000 964,000 $90,280,000 $16,345,000 Business Segment Profit (Loss)** Semiconductors Control Devices Educational and Productivity Solutions Financing Activities Total 591 Reported Profit (Loss) $ 90,000 44,689,000 (107,000) (3,698,000) $40,974,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-8, Continued Business Segment Assets** Semiconductors Control Devices Educational and Productivity Solutions Financing Activities Total Assets $28,220,000 36,320,000 6,750,000 6,015,000 $77,305,000 Based on the answer in part (1), students may appropriately combine the Educational and Productivity Solutions and the Financing Activities segments in a category labeled “other segments.” Geographic Area Revenues (Excluding Intersegment)** United States Japan Germany Other International Total Revenues $40,950,000 36,157,300 8,083,200 13,377,500 $98,568,000 Geographic Area Long-Lived Assets** United States Japan Germany Other International Total Assets $33,377,000 20,332,900 5,566,000 7,688,100 $66,964,000 **If available, comparison data for prior years would be included in the presentations 592 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-8, Concluded (3) Several ratios that may be helpful in analyzing segmental information are as follows: Educational and Control Productivity Semiconductors Devices Solutions $90,000 $44,689,000 ($107,000) Return on assets* $28,220,000 $36,320,000 $6,750,000 Operating profit margin Total asset turnover* Fixed asset turnover* Financing Activities Total ($3,698,000) $6,015,000 $40,974,000 $77,305,000 0.32% 123.04% –1.59% –61.48% 53.00% $90,000 $23,890,000 $44,689,000 $73,111,000 ($107,000) $5,360,000 ($3,698,000) $4,264,000 $40,974,000 $106,625,000 0.38% 61.12% –2.00% –86.73% 38.43% $23,890,000 $28,220,000 $73,111,000 $36,320,000 $5,360,000 $6,750,000 $4,264,000 $6,015,000 $106,625,000 $77,305,000 0.85 2.01 0.79 0.71 1.38 $23,890,000 $18,230,000 $73,111,000 $24,000,000 $5,360,000 $5,540,000 $4,264,000 $3,760,000 $106,625,000 $51,530,000 1.31 3.05 0.97 1.13 2.07 *If available, average assets/fixed assets would be used as the denominator The geographical area disclosures could provide information regarding fixed asset turnover Furthermore, one can develop a strong sense for market concentrations regarding geographical areas 593 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems PROBLEM 12-9 (1) Presentation of segmental values: A Revenues from: External customers $13,521,295 Intersegment sales Interest revenue Gain on intersegment sale of fixed assets Total revenues $14,562,250 Segment profit (loss): Total revenues from above $14,562,250 Cost of goods sold General and administrativeb Profit (loss) 6,086,250 Segment assets $21,579,000 $ D All Other Segments 2,556,570 $ 5,566,725 $ Reportable Segments B 4,023,500 $ 192,430 10,000 48,000 618,525 60,000 12,000 Total 1,374,500 810,955 130,000 $ 100,000a 4,171,500 $ 2,759,000 $ 6,245,250 $ 100,000 1,386,500 $ 4,171,500 $ 2,759,000 $ 6,245,250 $ 1,386,500 $ $ (2,154,000) (371,252) 1,646,248 8,048,000 (2,082,200) (1,723,200) (1,220,600) (7,180,000) (245,543) (555,810) (123,395) (1,296,000) $ 431,257 $ 3,966,240 $ 42,505 $ $ 5,324,000 $ 4,490,000 $ (2) Reconciliation of Significant Items to Consolidated Amounts Revenues Total revenues for reportable segments Revenues of nonreportable segments ($574,500 + $800,000 + $12,000) Elimination of intersegment revenues and gain on sale of fixed assets Corporate-level revenues Total consolidated revenues 594 $13,175,750 1,386,500 (910,955) $13,651,295 3,717,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-9, Concluded Profit or Loss Total profit or loss for reportable segments Profit or loss on nonreportable segments ($1,386,500 – $1,220,600 – $123,395) Elimination of intersegment profits: Intersegment sales and gain on sale of fixed assets Cost of goods sold General and administrative Corporate-level: Revenues ($32,000 + $315,000) General and administrative (20% × $1,620,000) Total consolidated pretax income from continuing operations Assets Total assets for reportable segments Assets of nonreportable segments Elimination of intersegment assets related to intersegment sales Corporate-level assets ($115,000 + $1,737,000) Total consolidated assets $ 6,043,745 42,505 (910,955) 798,848c 10,000a $ 347,000 (324,000) 6,007,143 $17,862,000 3,717,000 (102,107)d 1,852,000 $23,328,893 a Segment B should depreciate the original net book value of $200,000 over 10 years rather than the new selling price of $300,000 over 10 years Therefore, depreciation expense should be $20,000 per year versus $30,000 The gain on the sale of $100,000 ($300,000 – $200,000) is included in Segment A’s total revenue b The total revenue for all the segments is $14,562,250 (sales + interest revenue + gain on sale of fixed assets for all segments) The allocation of general and administrative expenses of $1,296,000 (80% × $1,620,000) is as follows: Segment A: ($4,171,500 ữ $14,562,250) ì $1,296,000 = $371,252 Segment B: ($2,759,000 ữ $14,562,250) ì $1,296,000 = $245,543 Segment D: ($6,245,250 ữ $14,562,250) ì $1,296,000 = $555,810 Other segments: ($1,386,500 ÷ $14,562,250) × $1,296,000 = $123,395 c Segment B recorded a cost of $144,000 on the sale to Segment C Segment C in turn recorded 75% of B’s selling price, or $144,323 (75% × $192,430), as cost of sales The total cost recorded was $288,323 ($144,000 + $144,323) However, the actual cost of goods sold was 75% of B’s cost of $144,000, or $108,000 Therefore, $180,323 ($288,323 – $108,000) of cost should be eliminated along with the $618,525 cost of the goods purchased by Segment A from Segment D d This represents the excessive net book value of $90,000 ($100,000 gain on sale – $10,000 excessive depreciation) on the equipment sold to B and the intercompany profit of $12,107 [($192,430 × 25% = $48,107) – $36,000] on the inventory purchased from B 595 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems PROBLEM 12-10 (1) Determination of whether segments are reportable: Segments Collision Repair Equipment Battery and Starter Parts Seating and Safety Paint and Trim Parts Tire Retreading Equipment Miscellaneous Products Totals Reported Revenues External Intersegment Total Profit (Loss) Assets $24,840,000 $24,840,000 $ 4,800,000 $ 45,720, 6,470,000 6,470,000 1,100,000 14,780,000 11,650,000 $ 2,200,000 13,850,000 4,450,000 20,100,000 5,400,000 25,500,000 2,280,000 47,800,000 4,780,000 4,780,000 700,000 13,950,000 3,556,000 8,650,000 2,200,000 16,570, 5,094,000 $72,934,000 $11,156,000 $84,090,000 $15,530,000 $176,320,000 Total of all reported profits Total of all reported losses Segments Collision Repair Equipment Battery and Starter Parts Seating and Safety Paint and Trim Parts Tire Retreading Equipment Miscellaneous Products Revenue 10% or More of $84,090,000? Yes No Yes Yes No Yes Is Segment’s Absolute Value of Profit or Loss 10% or More of $15,530,000? Yes No Yes Yes No Yes Significance of reportable segments: Consolidated revenue Percentage requirement Dollar requirement External revenue of all reportable segments 596 $15,530,000 × Assets 10% or More of $176,320,000? Yes No Yes Yes No No $79,684,000 75% $59,763,000 $61,684,000 Is Segment Reportable? Yes No Yes Yes No Yes To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-10, Continued (2) Presentation of segmental values: Reportable Segments Collision Repair Equipment Seating and Safety Revenues from: External customers Intersegment sales Total revenues $24,840,000 $24,840,000 Segment profit (loss) $ 4,800,000 Segment assets $45,720,000 Paint and Trim Parts $11,650,000 2,200,000 $13,850,000 $ $ $ 4,450,000 $37,500,000 Miscellaneous Products All Other Segments 20,100,000 $ 5,094,000 5,400,000 3,556,000 25,500,000 $ 8,650,000 $ 2,280,000 $ $ 2,200,000 $ 47,800,000 Reconciliation of Significant Items to Consolidated Amounts Revenues Total revenues for reportable segments Revenues of nonreportable segments Elimination of intersegment revenues Corporate-level revenues Total consolidated revenues $ $ 72,840,000 a 11,250,000 (11,156,000) 6,750,000 79,684,000 a $24,840,000 + $13,850,000 + $25,500,000 + $8,650,000 Profit or Loss Total profit or loss for reportable segments Profit or loss of nonreportable segments Elimination of intersegment profits (Note A) Corporate-level: Revenues Expenses Total consolidated pretax income b $4,800,000 + $4,450,000 + $2,280,000 + $2,200,000 597 Total $ $ 13,730,000b 1,800,000 (350,000) 6,750,000 (4,730,000) 17,200,000 $11,250,000 11,156, $11,250,000 1,800,000 $16,570,000 $ 15,530, $28,730,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 12—Problems Problem 12-10, Concluded Note A: The intercompany profit that is included in intersegment sales that remain in inventory is computed as follows: Gross Profit Ending Percent Original Inventory of Cost Cost Profit Segment d Battery and Starter Parts $ 420,000 40.00% $ 300,000 $120,000 Collision Repair Equipment 720,000 20.00 600,000 120,000 330,000 110,000 Collision Repair Equipment 440,000 33.33 $1,230,000 $350,000 $1,580,000 Assets Total assets for reportable segments Total assets for nonreportable segments Profit included in ending inventory from intersegment sales Corporate-level assets Total consolidated assets c $147,590,000c 28,730,000 (350,000) 29,860,000 $205,830,000 $45,720,000 + $37,500,000 + $47,800,000 + $16,570,000 d ($3,556,000 – $2,540,000) ÷ $2,540,000 = 40% Revenues from External Customers and Long-Lived Assets by Geographic Area United States Revenues from external customers: Segment revenues Corporate revenues Total Long-lived assets: Segment assets Corporate assets Total $ $ $ United Kingdom 37,196,340 3,442,500 40,638,840 95,212,800 16,124,400 $111,337,200 Italy $14,586,800 $ 1,350,000 $15,936,800 $ Mexico 7,293,400 $ 675,000 7,968,400 $ All Other Foreign 6,564,060 $ 607,500 7,171,560 $ Total 7,293,400 675,000 7,968,400 $ $ 72,934, 6,750,0 79,684, $37,027,200 $14,105,600 $17,632,000 $12,342,400 $176,320,000 6,270,600 2,388,800 2,986,000 2,090,200 29,860, $43,297,800 $16,494,400 $20,618,000 $14,432,600 $206,180,000 Revenues are attributed to geographic areas based on location of customer 598 ... The sales were generated by segment 574 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com To download more slides, ebook, solutions and test bank,... change in accounting principle resulted in an increase in tax expense for the first months of $7,163 ($27,996 vs $20,833) 563 $1,900,500 30,000 $1,870,500 To download more slides, ebook, solutions... this situation, the $175,000 loss should be reduced by the effective income tax benefit of $96,250 Thus, the loss should reduce net income by $78,750 ($175,000 – $96,250), and the nature of the