solusi manual advanced acc zy Chap013

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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
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
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:
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


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


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


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


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


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

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


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


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

Chapter 13 - Segment And Interim Reporting

P13-14 Segment Reporting Workpaper and Schedules
a.

Calvin, Inc.
Segmental Disclosure Workpaper

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
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


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%


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
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


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


P13-15 Interim Income Statement
a.

Estimate of effective annual tax rate at end of second quarter:
Estimated
Annual
Amounts
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


P13-16 Interim Income Statement
a.

Estimated effective annual tax rate as of the end of the second quarter:
Estimated
Annual
Amounts
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


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


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


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


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


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


P13-19 Segment Disclosures in Financial Statements
a.

Multiplex Inc.
Schedule for 10% Revenue Test
(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
(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


P13-19 (continued)
Multiplex Inc.
Schedule for Segment Assets Test
(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
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


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


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
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


P13-20 (continued)
The long-lived, productive assets test is shown below:
Watson Inc.
Long-Lived, Productive Assets Test Applied to Individual Foreign Operations
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


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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