ch13man

CHAPTER 13

SEGMENT AND INTERIM REPORTING

ANSWERS TO QUESTIONS

Q13-1 Information on a company's operations in different industries would be helpful to investors in their assessments concerning the different profit rates, different degrees and types of risk, and different opportunities for growth of each of the different industries. In general, this breakdown helps the investors look behind the consolidated totals to the individual components that comprise the company.

Q13-2 The relationship between the FASB's segment disclosure requirements and a company's profit centers focuses on the management viewpoint in FASB 131. The FASB requires that the definitions of operating segments used for internal decision-making purposes be used for presenting segment information for financial statement purposes.

Q13-3 The three ten percent significance tests used to determine reportable segments under FASB 131 are the 10 percent revenue test, the 10 percent operating profit (loss) test, and the 10 percent assets test.

For the 10 percent revenue test, the numerator and denominator are as follows: Each operating segment's total revenue (including intersegment transfers and sales) Combined revenue of all operating segments (including intersegment transfers and sales)

For the 10 percent profit (loss) test, the numerator and denominator are as follows:

Each operating segment's profit (loss) Absolute value of the combined profit orcombined 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.

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

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

are the 10 percent revenue test and the 10 percent long-lived asset test. The profit or loss test is not used for foreign operations because of the many differences in tax structures and accounting practices in different geographic areas.

Q13-7 A company must disclose for each of its significant customers the amount of sales to these customers and the associated industry segment. The names of the individual customers need not be disclosed, although some companies do disclose the names of the customers.

Q13-8 Interim reports can be used by investors to identify a company's seasonal trends by identifying the pattern of revenue and expenses as they occur each interim period.

Q13-9 The discrete view of interim reporting holds each interim period as a basic accounting period to be evaluated as if it were an annual accounting period. Any end-of-period adjustments and deferrals would be determined using the same accounting principles used for the annual report. The integral view of interim reporting holds each interim period as an installment of an annual period. Recognition and adjustment of certain income or expense items may be affected by judgments about the expected results of the entire year's operations. APB Opinion 28 uses the integral view of interim reporting.

Q13-10 Revenue from products sold or services rendered should be recognized as earned during an interim period on the same basis as followed for the full year. Revenue from seasonal businesses cannot be manipulated to eliminate seasonal trends.

Q13-11 Those costs and expenses that are associated directly with or allocated to the products sold or to the services rendered for annual reporting purposes should be treated similarly for interim reporting purposes. The following practical modifications are allowed to the general rule:

a. Estimated gross profit rates may be used to determine an interim period's cost of goods sold.

b. Temporary reductions of inventories expected to be replaced by the end of the fiscal year should not be expensed through cost of goods sold at historical cost if the company uses the lifo inventory valuation method. The expected replacement cost of the liquidated portion of the lifo base should be used for the interim period's cost of goods sold.

c. Inventory losses due to a decline in market prices are recognized in the period of decline using the lower-of-cost-or-market valuation method. Recoveries of market prices in later interim periods of the same fiscal year should be recognized as gains (recoveries of prior losses) in the later interim period.

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 benefitted. Thus, a portion of the $200,000 might be recognized over one or more interim periods. The discrete theory of interim reporting would recognize the entire $200,000 in the interim period when the expenditure was made.

Q13-14 At the end of the second interim period, the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis. The effective tax rate should reflect anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives. In arriving at this effective tax rate, no effect should be included for the tax related to significant unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year.

Q13-15 If the future realizability of the tax benefit is not assured beyond a reasonable doubt, the tax benefit is not shown in the interim statements.

Q13-16 Extraordinary items should be disclosed separately, included in the determination of net income for the interim period in which they occur, and shown net of applicable taxes. In determining materiality, extraordinary items should be related to the estimated income for the full fiscal year.

Q13-17 If a change in depreciation accounting is made, the prior interim reports must be restated as if the change had been made effective as of the first day of the fiscal year. The effect of this provision is to make all changes effective as of the beginning of the fiscal period and to use the new accounting method to present all interim reports for the fiscal year. Pro forma earnings per share figures are required to allow comparison with prior years' interim income statements.


SOLUTIONS TO CASES

C13-1 Segment Disclosures [CMA Adapted]

a. The purpose for requiring segment information to be disclosed in financial statements is to assist financial statement users in analyzing and understanding the enterprise's financial statements by permitting better assessment of the enterprise's past performances and future prospects.

b. The determination of the segments appropriate for an enterprise is the responsibility of management; that is, management should use its judgment in deciding how to report its segment information. Specific character-istics or sets of characteristics management can use in determining how to group its products into segments include the following:

1. Use of existing profit centers.

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).


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.


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 are met.

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

2. The absolute value of profit or loss is ten percent or more of the greater of either the total profit of segments that did not incur a loss or the total, in absolute amounts, of the segments that did incur a loss. For each segment, divide the absolute value of the profit or loss by the sum of the segment profits of $6,200. If the result is ten percent or more, the segment profit or loss test is met for that specific segment.

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

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

Bennett Inc. Results of Required Tests for Determining Segment Reporting

For the Year Ended December 31, 20X5

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

b. For the reportable segments of Bennett Inc. to represent a substantial portion of total operations, the combined revenue from sales to unaffiliated customers of all reportable segments must be at least 75 percent of the total sales for the company as a whole. Since the sales to unaffiliated customers of Bennett's reportable segments are $44,300 and represent approximately 96 percent of the company's total sales ($44,300 / $46,300), this criterion would be met.


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.


C13-5 Research Related to 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. A good front-end site for the Fortune 500 companies is located at http://www.fortune.com/fortune/fortune500/ This site has links to each of the homepages of the Fortune 500 companies as well as financial information on each of the firms. Alternatively, your students may simply use a web browser to do a search for a specific company.

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

C13-6 Research Related to Interim Reporting

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

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

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


SOLUTIONS TO EXERCISES

E13-1 Reportable Segments

a. Segment Revenuea Profit (loss)b Assetsc

Electronics No No No Bicycles Yes Yes Yes Sporting Goods No No No Home Appliances Yes Yes Yes Gas and Oil Yes Yes Yes Glassware No Yes No Hardware Yes Yes Yes

a Segment revenue greater than $77,500 ($775,000 x .10)

b Segment profit or loss greater than $10,370 ($103,700 total profit, excluding loss segments x .10)

c Segment assets greater than $118,500 ($1,185,000 x .10)

All segments but Electronics and Sporting Goods are separately reportable.

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

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

Yes, the 75 percent test is met.


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

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

2. d

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

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

5. c

6. a

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

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

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

9. c

10. c

11. d

12. a


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 which benefit other interim periods should be allocated to the interim periods benefitted. In the case of Park Corp., the $40,000 of property taxes should be allocated to all interim periods. For the six months ended June 30, 20X5, Park should recognize 50% of the $40,000, or $20,000, as an expense. However, the entire $100,000 net loss from the disposal of the business segment should be recognized as a loss for the six months ended June 30, 20X5. Therefore, a total of $120,000 should be included in the determination of Park's net income for the six months ended June 30, 20X5.


E13-4 Temporary LIFO Liquidation

a. Cost of Goods Sold 16,800 Inventory 11,040 Excess of Replacement Cost over LIFO Cost of Inventory Liquidation 5,760 Sold 920 units of lifo base of which 640 units will be replaced: $11,040 = 920 units x $12 lifo cost $5,760 = 640 units x $9 ($21 replacement cost less $12 lifo cost)

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


E13-5 Inventory Write-Down and Recovery

Cost of + Inventory Adjustment = Cost ofQuarter Units Sold to Market Goods Sold

I $10,200 + $800 = $11,000 (1,000 x $10.20) (8,000 x $.10) $10.20 is unit write down to cost from 20X1 $10.10

II $5,050 - $750 = 4,300 (500 x $10.10) (7,500 x $.10) recovery to $10.20 original cost

III $15,300 + $1,800 = 17,100 (1,500 x $10.20) (6,000 x $.30) write down to $9.90

IV $19,800 - $400 = 19,400 (2,000 x $9.90) (4,000 x $.10) recovery to $10.00 Total $51,800

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

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


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

1. a

2. b $170,000 x .45 = $ 76,500 $130,000 x .40 = (52,000) Third quarter $ 24,500

3. c Net operating loss credit ($100,000 x .40) $ 40,000 Other tax credit 10,000 Total credits $ 50,000 â Estimated annual operating loss â$100,000 Tax benefit rate ($50,000 / $100,000) .50 x Operating loss in first quarter $ 20,000 Tax benefit in first quarter $ 10,000

4. c

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

E13-7 Significant Foreign Operations Percent of Sales to Consolidated Geographical Unaffiliated Revenue of Separately Area Customers $793,000 Reportable

U.S. $364,000 45.9% Yes Britain 252,000 31.8 Yes Brazil 72,000 9.1 No Israel 58,000 7.3 No Australia 47,000 5.9 No Consolidated Revenue $793,000

Note that the country-based revenue test is based on sales to unaffiliated customers. All countries having material sales to unaffiliated customers of $79,300 ($793,000 x .10) or more must be separately reported.

Percent of Total Long- Geographical Long-Lived Lived Assets Separately Area Assets of $1,182,000 Reportable

U.S. $ 509,000 43.1% Yes Britain 439,000 37.1 Yes Brazil 93,000 7.9 No Israel 66,000 5.6 No Australia 75,000 6.3 No Consolidated Assets $1,182,000

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


E13-8 Major Customers

Major customers are those to whom sales equal or exceed $4,300,000 ($43,000,000 x .10). Government units under common control are classified as a single customer. However, counties are not under the common control of the state government.

Service contracts $6,100,000 ($3,900,000 + $2,200,000 under common control)

Computer software $4,650,000

Computer software $5,400,000

E13-9 Estimated Annual Tax Rates

a. Estimated Annual Amounts

Income from continuing operations $1,500,000 Adjustment for permanent differences: Add: Premium for life insurance $ 60,000 Less: Dividends excluded (80,000) (20,000) Estimated annual taxable income $1,480,000 Combined tax rate .50 Estimated annual taxes before credits $ 740,000 Deduct business tax credit (20,000) Estimated income taxes for year $ 720,000

Estimated effective annual tax rate = $720,000 / $1,500,000 = .48

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


E13-10 Operating Loss Tax Benefits

Income (Losses) Est. Tax (Benefit) Before Taxes Annual Less Reported Year- Effect Year- Previous inPeriod Period to-Date Tax Rate to-Date Provided Period

1 $(100,000) $(100,000) .40 $(40,000) $(40,000) 2 80,000 (20,000) .40 (8,000) $(40,000) 32,000 3 160,000 140,000 .45 63,000 (8,000) 71,000 4 400,000 540,000 .45 243,000 63,000 180,000Total $ 540,000 $243,000

E13-11 Disclosure Tests Including a Finance Segment

a. Three 10 percent significance tests

1. Revenue

Operating Percent of Combined Separately Segment Revenue Revenue of $1,360 Reportable

Textiles $ 850 62.5% Yes Paper Goods 410 30.1 Yes Finance 100 7.4 No Total $1,360

Note that the combined revenue of the Finance segment includes both interest revenue from external parties and interest revenue from intersegment financing. The intersegment interest revenue is not included as part of the revenue of the Textiles segment because the chief operating decision maker has defined segment profit for the manufacturing segments to exclude financing information.

2. Segment profit or loss

Operating Segment Percent of Test Separately Segment Profit Amount of $400 Reportable

Textiles $ 280(a) 70.0% Yes Paper Goods 110(b) 27.5 Yes Finance 10(c) 2.5 No Total $ 400

(a) $280 = $850 - ($400 + $30 + $100 + $40) (b) $110 = $410 - ($180 + $10 + $80 + $30) (c) $ 10 = $100 - ($10 + $40 + $10 + $30)

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


E13-11 (continued)

3. Segment assets

Operating Segment Percent of Test Separately Segment Assets Amount of $6,000 Reportable

Textiles $3,000 50.0% Yes Paper Goods 2,000 33.3 Yes Finance 1,000 16.7 Yes Total $6,000

Note that the segment assets definition for this company for the Textiles segment does not include the intersegment loan, while the definition of segment assets of the Finance segment for this company includes both loans to external parties and intersegment loans.

b. Comprehensive disclosure tests

1. The 75 percent test:

Revenue from unaffiliated customers of separately reportable segments: Textiles $ 800 Paper Goods 400 Finance 60 Total unaffiliated revenue of separately reportable segments $1,260

Consolidated revenue $1,260

Reportable segments' percentage of total revenue ($1,260 / $1,260) 100%

2. The 10-segment test:

The company has only three separately reportable segments.


E13-12 Industry Segment and Geographic Area Revenue Tests

a. Operating segments revenue test (in thousands)

Combined Percent of Combined Separately Operating Segment Revenue Revenue of $1,385 Reportable

Ethical Drugs $ 320 23.1% Yes Nonprescription Drugs 515 37.2 Yes Generic Drugs 470 33.9 Yes Industrial Chemicals 80 5.8 No Total $1,385

b. Geographic Area revenue test (in thousands) Unaffiliated Percent of Consolidated Separately Geographic Area Revenue Revenue of $1,165 Reportable

Domestic $ 820 70.4% Always Mexico 245 21.0 Yes* Taiwan 100 8.6 No* Total $1,165

*Assuming a 10% materiality threshold. Individual foreign countries exceeding 10% would be listed separately. In this case, only Mexico would have to be separately reported.

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

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

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

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

*Individual foreign countries exceeding 10% of total unaffiliated revenue ($1,165) would be listed separately. In this case, only

Mexico would be reported separately.


E13-13 Different Reporting Methods for Interim Reports [CMA Adapted]

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

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

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

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

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

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


SOLUTIONS TO PROBLEMS

P13-14 Segment Reporting Workpaper and Schedules

a. (1) Corporate Intersegment Consol- A B C D Admin. Combined Eliminations idated

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

Assets: Segment 400,000 105,000 500,000 75,000 1,080,000 1,080,000 General corporate 120,000 120,000 120,000Total assets 400,000 105,000 500,000 75,000 120,000 1,200,000 1,200,000

a $17,000 = ($340,000 / $900,000) x $45,000 $ 6,500 = ($130,000 / $900,000) x $45,000 $17,900 = ($358,000 / $900,000) x $45,000$ 3,600 = ($ 72,000 / $900,000) x $45,000


P13-14 (continued)

(2) Segment Segment Segments Revenuea Profitb Assetsc

A Yes Yes Yes B Yes Yes No C Yes Yes Yes D No No No

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

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

Note that the segment profit (loss) test is based on the larger of the absolute values of the total segment profit or the total segment loss of the segments. The absolute value of the total segment profit of $161,600 for the three segments (A, B, and C) reporting segment profits exceeded the total segment loss ($13,600) for the segment reporting a loss (segment D only).

c Separately reportable if segment assets greater than or equal to $108,000 ($1,080,000 total operating segment assets x .10).

A, B, and C are separately reportable.

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

Country Revenuea Long-Lived Assetsb

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

a Separately reportable if country’s revenue to outsiders greater than or equal to $81,000 (consolidated revenue of $810,000 x .10).

b Separately reportable if long-lived assets, which are one-half of total assets, are greater than or equal to $54,000 (total long-lived assets of $540,000 x .10).

Foreign countries B and C are separately reportable.

c. Sales greater than or equal to $81,000 to a single customer would be noted. (Consolidated revenue of $810,000 x .10)

- 23 -

P13-15 Segment Reporting Workpaper and Schedules [AICPA Adapted]

a. Calvin, Inc.Segmental Disclosure Workpaper


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

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

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

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

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

- 24 -

P13-15 (continued)

b. Separately reportable segments.

Segment Segment Revenuea Profitb Assetsc

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

a Separately reportable if segment's total sales greater than or equal to $211,000 (combined total sales of $2,110,000 x .10).

b Separately reportable if segment's profit greater than or equal to $36,200 (combined profitable segments' profits of $362,000 x .10).

c Separately reportable if segment's assets greater than or equal to $148,000 (combined assets of $1,480,000 x .10).

The Apparel, Building, and Machinery segments are separately reportable because they pass at least one of the three 10 percent tests.

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

Sales to unaffiliated customers of the separately reportable segments > 75% Sales to unaffiliated customers for all segments

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

P13-15 (continued)

c.Calvin, Inc.Footnote X

Information about the Company's Operations in Different Operating Segments

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

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

Unallocated general corp. expenses (35,000)Income from continuing operations $ 309,000

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

General corporate assets 125,000Total assets $1,605,000

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

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

Reconciliation of Reportable Segment Reconciliation of Reportable Segment Profit andRevenue to Consolidated Revenue Loss to Consolidated Profit or Loss: Total revenue for reportable segments $1,940,000 Total profit and loss for reportable segments $362,000 Other revenues 170,000 Other loss (18,000) Elimination of intersegment revenues (160,000) General corporate expenses (35,000) Total consolidated revenues $1,950,000 Income before taxes $309,000

Reconciliation of Reportable Segment Assets to Consolidated Assets: Total assets of reportable segments $1,310,000 Other assets 170,000 General corporate assets 125,000 Consolidated total assets $1,605,000


P13-15 (continued)


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

Segment Profit Segment Revenue (Loss) Assets

Apparel $870,000 = 41.2% $110,000 = 30.4% $610,000 = 41.2% $2,110,000 $362,000* $1,480,000

Building $750,000 = 35.6% $155,000 = 42.8% $460,000 = 31.1% $2,110,000 $362,000 $1,480,000

Chemical $60,000 = 2.8% $5,000 = 1.4% $80,000 = 5.4% $2,110,000 $362,000 $1,480,000

Furniture $110,000 = 5.2% $13,000 = 3.6% $190,000 = 12.8% $2,110,000 $62,000 $1,480,000

Machinery $320,000 = 15.2% $ 97,000 = 26.8% $140,000 = 9.5% $2,110,000 $362,000 $1,480,000

*The total of the three positive segment incomes ($362,000 = $110,000 + $155,000 + $97,000)

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

Revenue Profit Assets

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

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


P13-16 Interim Income Statement

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

Estimated Annual Amounts

Income from continuing operations $600,000 Less: Dividend exclusion (30,000) Estimated annual taxable income $570,000 Combined tax rate x .50 Estimated annual taxes before credits $285,000 Less: Business tax credit (15,000) Estimated income taxes for year $270,000

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

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

Sales $850,000 Cost of goods sold 525,000a

Gross profit $325,000 Operating expense ($230,000 - $45,000 factory rearrangement deferred) 185,000 Income before taxes $140,000 Income taxes 68,000b

Net income $ 72,000

a Computation of Cost of Goods Sold

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

b Computation of Income Taxes

Income (Loss) Estimated Tax (Benefit) Before Taxes Annual Less Reported Interim Current Year- Effective Year- Previously in this Period Period to-date Tax Rate to-date Provided Period

1 100,000 100,000 .40 40,000 40,000

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



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

Estimated Annual Amounts

Income from continuing operations $600,000 Less: Dividends received deduction (75,000) Estimated taxable income $525,000 Combined taxable rate .40 Estimated tax before credits $210,000 Less: Business tax credit (15,000) Estimated income taxes $195,000

Estimated effective annual tax rate ($195,000/$600,000) = .325


P13-17 (continued)

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

Sales $1,200,000 Cost of goods sold Beginning inventory $ 78,000 Purchases 650,000 Goods available $728,000 Less: Ending inventory (80,000)a

$648,000 Less: Recovery from LCM (4,000) 644,000 Gross profit $ 556,000 Operating expense 320,000 Income before taxes $ 236,000 Income taxes 87,950b

Net income $ 148,050

a Computation of ending inventory

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

b Computation of income taxes

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

1 (90,000) (90,000) .45 (40,500) (40,500) 2 236,000 146,000 .325c 47,450 (40,500) 87,950

c See solution to part a.



a. Burrows Company Schedule of Cost of Goods Sold For Quarter Ended June 30, 20X5

Inventory, April 1, 20X5 $ 900,000 Cost of goods manufactured 1,000,000 Goods available for sale $1,900,000 Inventory, June 30, 20X5 (800,000) Cost of goods sold__unadjusted $1,100,000 Add: Excess of replacement cost of inventory liquidated over historical cost ($175,000 - $100,000) 75,000 Cost of goods sold for second quarter__adjusted $1,175,000

b. Burrows Company Schedule of Selling and General Expenses

For Quarter Ended June 30, 20X5

Selling and general expenses incurred during the second quarter $300,000 Add: Estimated property tax expense ($40,000 / 4 quarters) 10,000 Allocated portion of advertising cost ($50,000 / 2 quarters) 25,000 Total selling and general expenses for the second quarter $335,000

c. Burrows Company Income Statement


Sales $1,700,000 Cost of goods sold (1,175,000) Gross profit $ 525,000 Selling and general expenses (335,000) Operating income before taxes $ 190,000 Income tax expense__see answer for part (d) (67,600) Income before extraordinary item $ 122,400 Extraordinary gain from early extinguishment of debt, net of taxes of $98,000 182,000 Net income $ 304,400


P13-18 (continued)

d. Burrows Company Schedule Computing Tax Expense


Operating income before taxes for the first quarter $150,000 Operating income before taxes for the second quarter 190,000 Total operating income for the six months ended June 30, 20X5 $340,000 Estimated effective annual tax rate determined at the end of the second quarter .34 Total tax expense for the six months ended June 30, 20X5 $115,600 Less: Tax expense determined at the end of the first quarter ($150,000 x .32) (48,000) Income tax expense for the second quarter $ 67,600


P13-19 Evaluating Foreign Operations

a. Profit or loss for each geographic area:

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

a $100 = ($2,500 sales to unaffiliated / $3,000 total sales to unaffiliated) x $120 common costs to be allocated

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

a. Revenues from external customers attributed to (1) the company’s home country of domicile and (2) the total revenue attributed to all foreign countries in which the enterprise generates revenues. If revenues from external customers generated in an individual country is material, then the revenues for that country shall be separately disclosed.

b. Long-lived productive assets (1) located in the entity’s home country of domicile and (2) the total assets located in all foreign countries in which the entity holds assets. If assets in an individual foreign country are material, then the amounts of assets held in that specific country shall be disclosed separately.

Total foreign sales to unaffiliates = $500 = 16.6% Consolidated sales to unaffiliates $3,000

Total foreign assets = $500 = 18.5% Total long-lived assets $2,700

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


P13-19 (continued)

c. Separately reportable foreign segments:

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

Domestic $2,500 83.3% Yes New Zealand 320 10.7 Yes Singapore 60 2.0 No Australia 120 4.0 No Total $3,000 100.0%

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

Domestic $2,200 81.4% Yes New Zealand 280 10.4 Yes Singapore 140 5.2 No Australia 80 3.0 No Total $2,700 100.0%

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


P13-20 Interim Accounting Changes

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

Earnings Net Gross from Continuing Net Quarter Ended Sales Profit Operations Earnings 20X2: March 31* $388 $129 $24.6 $23.6 June 30* 406 131 27.6 32.6 September 30 428 147 29.6 29.6 20X1: March 31 394 139 27 28 June 30 416 151 32 31 September 30 403 148 31 31 December 31 385 134 11 12

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


P13-20 (continued)

b. Changes in accounting principles are made effective as of the first day of the current fiscal period. For Square Q Company, the cumulative effect is computed as of January 1, 20X2. The prior years' interims are not restated, although pro forma earnings must be presented which include the new accounting method. The accelerated method of depreciation will be used to determine the earnings from continuing operations for each of the first three quarters of 20X2, and the cumulative effect, net-of-tax, will be included in net earnings for the first quarter of 20X2.

Cumulative effect as of January 1, 20X2: January 1, 20X2:

Accumulated straight line depreciation $160 (4 x $40) Accumulated accelerated depreciation 190 ($50+$48+$47+$45) Difference $ 30 Tax ($30 x .40 tax rate) (12) Cumulative effect, net-of-tax $ 18

This cumulative effect will result in a decrease of net earnings of $18 due to the larger amount of depreciation that would have been recognized using the accumulated depreciation method.

The earnings from continuing operations for each of the first three quarters of 20X2 will be restated for the difference between the two depreciation methods, net-of-tax. For example, in Quarter I, there is no difference in depreciation. In Quarter II, the restated earnings from continuing operations would be increased for the $600 decrease in depreciation, net-of-tax ($1,000 x .60). Quarter III would be increased by $1,800 ($3,000 x .60).

Earnings Net Gross from Continuing Net Quarter Ended Sales Profit Operations Earnings 20X2: March 31* $388 $133 $27 $ 8 June 30* 406 135 30.6 35.6 September 30 428 151 33.8 33.8

Pro Pro 20X1: Forma Forma March 31 394 139 27 21 28 22 June 30 416 151 32 27.2 31 26.2 September 30 403 148 31 26.8 31 26.8 December 31 385 134 11 8 12 9

*Restated for a change in accounting principle from the straight-line method of depreciation to the accelerated method. Net earnings for the first quarter of 20X2 includes the $18,000 decrease from the cumulative effect of the accounting change. Pro forma earnings are presented for 20X1.


P13-20 (continued)

c. Change in method of accounting for long-term accounting contracts requires the retroactive restatement of all prior interims, including those of previous years. The impacts on sales and gross profits for each of the quarters are as follows:

Completed Percentage-of- Effect of Contract Completion Change Gross Gross Gross Quarter Ended Sales Profit Sales Profit Sales Profit 20X2: March 31 $ 80 $20 $60 $30 $(20) $10 June 30 0 0 55 30 55 30 September 30 100 50 70 40 (30) (10) 20X1: March 31 60 40 60 40 June 30 150 100 40 20 (110) (80) September 30 0 0 50 30 50 30 December 31 60 40 50 30 (10) (10)

Parentheses around the amount in the Effect of Change column indicates a reduction of the reported amount. The effect on earnings from continuing operations will be the net-of-tax effect of the effect of the change on the gross profit. For example, the effect of the change on earnings for the first quarter of 20X2, ending March 31, will be $6 ($10 x .60).

Earnings Net Gross from Continuing Net Quarter Ended Sales Profit Operations Earnings 20X2:* March 31 $368 $143 $33 $32 June 30 461 165 48 53 September 30 398 141 26 26 20X1:*

March 31 454 179 51 52 June 30 306 71 (16)Loss (17)Loss September 30 453 178 49 49 December 31 375 124 5 6

*All quarters have been restated for the change in accounting for long-term contracts.

Note that the revenue and income streams are quite volatile after the change in accounting method. Of special note is that the previously reported continuing operations earnings of $32 in the second quarter of 20X1, ending June 30, 20X1, is changed to a loss of $16. Introducing this amount of volatility into an income stream may be a reason that a firm may not want to make an accounting change.


P13-21 Interim Income Statement for First Two Quarters

a. Burnell Inc.Interim Income Statement

Three Months Six Months Ended June 30, 20X5 Ended June 30, 20X5 Sales $1,540,000 $2,890,000(a) Cost of goods sold (1,080,000) (2,015,000) Gross profit $ 460,000 $ 875,000(b) Selling and general expenses (206,300) (405,800) Operating income $ 253,700 $ 469,200 Interest expense (55,000) (105,000) Income before taxes and cumulative effect $ 198,700 $ 364,200(c) Income tax expense (58,794) (116,544) Income before cumulative effect of change in accounting principle $ 139,906 $ 247,656(d) Cumulative effect of changing from the sum-of-the-years' digits to the straight-line method, net of taxes of $15,360 --- 32,640 Net income $ 139,906 $ 280,296

Supporting schedules:

(a) Cost of goods sold: Quarter Six Months Ended June 30 Ended June 30 Beginning inventory $ 320,000 $ 250,000 Cost of goods manufactured 1,100,000 2,105,000 Total cost of goods available $1,420,000 $2,355,000 Ending inventory (340,000) (340,000) Cost of goods sold $1,080,000 $2,015,000

(b) Selling and general expenses: Quarter Ended Quarter Ended March 31 June 30 Total Selling and general expenses reported $200,000 $ --- $200,000 Less: Depreciation expense (6,000) (6,000) Warranty expense (40,500) (40,500) Selling and general expenses not including depreciation and warranty expenses $153,500 170,000 $323,500 Add: Warranty expense: $1,350,000 x .03 40,500 40,500 $1,540,000 x .02 30,800 30,800 Depreciation expense: $220,000 / 10 years = $22,000 per year / 4 quarters 5,500 5,500 11,000 Total expenses $199,500 $206,300 $405,800


P13-21 (continued)

(c) Income tax expense:

Income before tax for the six months ended June 30, 20X5 $364,200 Estimated annual effective rate determined at June 30 .32 Income tax expense for six months ended June 30, 20X5 $116,544 Less: Income tax expense for the three months ended March 31, 20X5 (57,750) Income tax expense for the second quarter ended June 30, 20X5 $ 58,794

(d) Cumulative effect of changing accounting principles:

Accumulated depreciation at January 1, 20X5 (depreciation expense for 2091 through 2094) using the sum-of-the-years' digits method of depreciation:

10 + 9 + 8 + 7 ($240,000 - $20,000) x ________________ = $136,000 55

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

4 years ($240,000 - $20,000) x ____________ = (88,000) 10 years

Cumulative effect before income taxes $ 48,000 Income taxes (.32 x $48,000) (15,360) Cumulative effect, net of taxes $ 32,640

b. Cost of goods sold for the second quarter if the market declines were considered to be permanent:

Beginning inventory, April 1, 20X5 $ 315,000 Cost of goods manufactured 1,100,000 Cost of goods available $1,415,000 Less ending inventory, June 30, 20X5 (330,000) Cost of goods sold $1,085,000


P13-22 Segment Disclosures in Financial Statements

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

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

Multiplex Inc. Schedule for the 10% Segment Profit or Loss Test

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

Determination of the profit of each segment (in millions):

Car Communi- Health/ Heavy Rental Aerospace cations Fitness Equipment Revenue $39 $204 $60 $50 $275 Cost of goods sold (141) (177) Selling expenses (16) (42) (29) (23) (37) Other traceable expenses (4) (8) (11) (5) (10) Allocation of common costs (2) (7) (2) (2) (7) Operating profit $17 $ 6 $18 $20 $ 44

Total profits amount to $105,000,000 ($17 + $6 + $18 + $20 + $44). P13-22 (continued)

Multiplex Inc. Schedule for Segment Assets Test



(in millions)

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

Multiplex Inc. Schedule of Reportable Segments

For the Year Ended December 31, 20X5 Revenue Segment Test Profit Test Assets Test Segment Car Rental No Yes No Yes Aerospace Yes No Yes Yes Communications No Yes Yes Yes Health/Fitness No Yes Yes Yes Heavy Equipment Yes Yes Yes Yes

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


P13-22 (continued)

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

Multiplex Operations Industry Segments (in millions)

Car Aero- Communi- Health/ Heavy Item Rental space cations Fitness Equip. CombinedSales to unaffiliated customers $34 $204 $60 $50 $250 $598Intersegment sales 5 25 30Total revenue $39 $204 $60 $50 $275 $628

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

Reconciliation of Reportable Segment Profit and Lossto Consolidated Profit and Loss

Total profit or loss for reportable segments $105 Elimination of unrealized intersegment profits (7) Other corporate expenses (unallocated) 33 Income before income taxes and extraordinary items $ 65

Reconciliation of Reportable Segment Revenuesto Consolidated Revenues

Total revenues for reportable segments $628 Elimination of intersegment revenues (30) Total consolidated revenues $598

Reconciliation of Reportable Segment Assetsto Consolidated Assets

Total assets for reportable segments $472 Intercompany receivable (15) Unrealized company profit ( 7) (a reduction of the carrying amount of property, plant and equipment) Unallocated corporate assets 25 Consolidated total $475


P13-23 Reporting Operations in Different Industries

a. First, FASB 131 requires companies to disclose revenues and long-lived, productive assets in total for domestic and all foreign operations. Then, if revenues or long-lived assets are material in any single country, that disclosure must be made on a country basis. Therefore, the company would disclose total revenues and total long-lived assets for the domestic operations and for total foreign operations.

Revenues:

Sales to unaffiliated customers from operations in France, Mexico, and Japan total $426,000,000.

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

Long-lived assets:

Long-lived, productive assets of foreign operations total $370,000,000.

$370,000,000 / $750,000,000 = 49.3%

b. The determination of which foreign operations, on a country basis, are separately reportable depends upon two tests to determine which individual foreign operations must be separately disclosed. Watson uses a 10 percent materiality threshold for these tests.

The 10% revenue test is shown below:

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

Sales to Geographic Unaffiliated Percent of Consolidated Separately Area Customers Revenue of $856,000,000 Reportable Domestic $430,000,000 50.2% Yes France 300,000,000 35.0% Yes Mexico 36,000,000 4.2% No Japan 90,000,000 10.5% Yes Total $856,000.000

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


P13-23 (continued)

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

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

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

The company will disclose the long-lived assets in France and Japan.

Watson Inc.Geographic Information

(In $millions) Long-Lived Revenues Assets United States $430 $235 France 300 160 Japan 90 81 Other 36 29 $856 $505


P13-24 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

14. S


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ch13man

Documents

percent revenue test

percent assets test

percent profit loss

industry segments q13

reportable segments

number of segments

remaining segments

percent tests