46. Millstone Company’s first-quarter 20X3, pretax income is $25,000. The company anticipates an annual tax
credit of $5,500. Millstone is projecting income for the remaining three quarters of $95,000. For the second
quarter of 20X4, Millstone reports $55,000 of pretax income with a projected pre-tax income for the remainder
of the year of $65,000. Millstone does not have any permanent differences between taxable income and
financial income.
In the second quarter, Millstone decided to change their depreciation method used for financial reporting
purposes. The change in depreciation methods has the following effect on the calculation and projection of
income for Millstone:
Actual Income
Projected Remainder
Qtr1
20,000
85,000
Qtr2
55,000
65,000
The effect of the change on prior years is a decrease to retained earnings of $30,000.
The current tax schedule is:
$1-$100,000
15%
$100,001-200,000
22%
$200,001-460,000
28%
$460,001 and above
30%
Required:
Calculate the first and second quarter interim tax expenses on continuing income.
(Benefit)
Period
Inc Type
Current
YTD
Effective%
YTD
Previous
Current
ordinary
25,000
25,000
11.58%
2,895
–
2,895
ordinary
55,000
80,000
13.38%
10,704
2,896
7,809
ordinary
20,000
20,000
10.10%
2,020
–
2,020
ordinary
55,000
75,000
13.07%
9,803
2,020
7,783
47. Corriveau Industries decided to switch from an accelerated depreciation method to a straight-line method in
the second quarter of 20X1. This is classified as a cumulative effect of a change in accounting principle. The
first-quarter, pretax income reported was $30,000, and projected pretax income for 20X1 was $90,000. If
Corriveau had used straight-line depreciation for the quarter, pretax income would have been $35,000 and
projected pretax income for 20X1 would have been $110,000. The cumulative effect on prior years from the
change is a $50,000 increase in retained earnings. The second-quarter income using straight-line depreciation is
$20,000, and the expected annual earnings continue to be $110,000. Assume that Corriveau is subject to a flat
25% statutory tax rate for 20X1. Corriveau is expecting $5,000 of tax-free income during the third and fourth
quarters of 20X1.
Required:
For all categories of income, calculate the interim tax expense for the first quarter, first quarter restated, and
second quarter.
48. Futura Corporation reported pretax net income of $30,000 in the first quarter of 20X1. The company
anticipated pretax net income of $90,000 for the year. During the second quarter, after issuing the first-quarter
interim statement, Futura decided to discontinue its electronics division and adopted a formal plan for its
disposal.
During the first quarter, the electronics division reported a pretax loss of $70,000 and estimated a $270,000
operating loss for the year. During the second quarter, the division experienced an operating loss of $35,000
prior to the measurement date and $8,000 in the remainder of that quarter. The anticipated loss on the disposal
of that division’s assets was $40,000.
Futura had a flat 25% tax rate for 20X1. The firm is expecting a $5,000 tax credit attributed to operations
outside of the electronic division. Second-quarter pretax income for the non-electronics operations was $40,000.
As of the end of the second quarter, annual pretax income of $225,000 was anticipated for continuing
operations.
Required:
In good form, prepare a schedule showing the income (loss) and tax expense (benefit) determination for the first
quarter, the restated first quarter, and the second quarter.
49. Consider the following:
Case A
Income (loss) for quarters 1 through 4 is ($50,000), $30,000, $40,000, and $40,000, respectively. Future projected income
for the year is uncertain at the end of quarters 1 and 2. Annual income at the end of quarter 3 is estimated to be $20,000.
No carryback benefit exists, and any future annual benefit is uncertain.
Case B
Assume the same facts as in Case A. However, at the end of quarters 1 through 3, annual income is estimated to be
$40,000.
Case C
Quarterly income (loss) levels were $15,000, ($35,000), ($75,000), and $25,000. A yearly operating loss of $70,000 was
anticipated throughout the year. Prior years’ income of $28,000 is available for carryback. The same tax rates were
relevant to the carryback period
Required:
For cases A through C, complete the schedule that follows: Assume that the statutory tax rate is 15% on the first $50,000 of income, 25% on the next
$25,000, and 30% on income in excess of $75,000.
Income (Loss)
Tax
Tax Expense
(Benefit)
Case
Quarter
Current
Year to Date
Rate
Year to Date
Current
1
2
3
4
50. East Company, a highly diversified corporation, reports the results of operations quarterly. At the beginning
of the third quarter, management decided to discontinue its recreational division. At this time, a formal plan was
authorized, calling for disposal by year end. Results for the current year, excluding taxes, are as follows:
Quarter
Continuing
Operations
Discontinued
Segment
First
$33,000
Second
40,200
Third
62,000
$(6,500)
Fourth
71,500
1,200
The following additional information was provided:
a.
The first two quarters include results of operations of the discontinued segment. The segment reported first and second quarter pretax
losses of $8,000 and $12,000, respectively.
b.
The estimated annual income tax rate in the first and second quarters was 35%. Because of the decision to discontinue, the revised annual
effective tax rate was determined to be 40%.
Required:
For each quarter, present the results of operations and the related tax expense or tax benefit. Where applicable, include the original and restated
amounts in the presentation.
Income
(Loss)
A
B
C
Current
Year
Effective
Quarter
Type of Income
Period
to Date
Tax Rate
First
Continuing Operation
$33,000
$ 33,000
35%
First-Restated
Continuing Operation
41,000
41,000
40%
Discontinued Operation
(8,000)
(8,000)
40%
Second
Continuing Operation
40,200
73,200
35%
Second-Restated
Continuing Operation
52,200
93,200
40%
Discontinued Operation
(12,000)
(20,000)
40%
Third
Continuing Operation
62,000
155,200
40%
Discontinued Operation
(6,500)
(26,500)
40%
Fourth
Continuing Operation
71,500
226,700
40%
Discontinued Operation
1,200
(25,300)
40%
(Benefit)
D = B x C
E
F = D – E
Year
Previously
Current
Quarter
Type of Income
To Date
Reported
Period
First
Continuing Operation
$11,550
$ 0
$11,550
First-Restated
Continuing Operation
16,400
0
16,400
Discontinued Operation
(4,850)
0
(4,850)
Second
Continuing Operation
25,620
11,550
14,070
Second-Restated
Continuing Operation
37,280
16,400
20,880
Discontinued Operation
(11,660)
(4,850)
(6,810)
Discontinued Operation
(10,600)
(11,660)
1,060
Fourth
Continuing Operation
90,680
62,080
28,600
Discontinued Operation
(10,120)
(10,600)
480
51. Adam Enterprise includes seven industry segments. Operating profits (losses) relating to those segments are:
Segment
Operating
Profit (Loss)
1
$ 100,000
2
500,000
3
400,000
4
(295,000)
5
(600,000)
6
(100,000)
7
(105,000)
Required:
Based only on the above operating profit(loss) information, which of Adam’s segments would be reported separately?
Total segments reporting a profit:
1
$ 100,000
2
500,000
3
400,000
Total
$1,000,000
Total segments reporting a loss:
4
(295,000)
5
(600,000)
6
(100,000)
7
(105,000)
Total
$(1,100,000)
The greater absolute value is the total of the (loss) segments.
10% ´ 1,100,000 = 110,000
Any segment reporting a profit exceeding $110,000 or a loss exceeding ($110,000) would be reported.
Reportable segments: 2, 3, 4, 5
52. Santas Corporation is a diversified firm with operations in the United States, Canada, Chile, Spain, and
France, each of which qualifies as a geographic segment. Data with respect to those segments follows:
Revenues (in thousands)
Unaffiliated
Intersegment
Profit
Segments:
Customers
Sales
Total
(Loss)
Assets
US
$ 800
$ 0
$ 800
$200
$ 300
Canada
450
150
600
150
200
Chile
600
60
660
240
350
Spain
280
0
280
(30)
180
France
300
100
400
(110)
90
$2,430
$310
$2,740
$ 450
$1,120
Corporate-level
700
0
700
100
1,000
Total
$3,130
$310
$3,440
$ 550
$2,120
Required:
Determine which of the Santas segments would be reportable segments, and explain why.
test:
$2,430
Unaffiliated sales
310
Intersegment sales
$2,740
Combined revenue
´ 10%
$ 274
Revenue minimum
Minimum for profit or loss $590 ´ 10% $59
53. Information about the seven segments of the Kenny Corporation is presented below. Determine which of the
segments are reportable and why.
General and
Revenue from
Administrative
Total
Segment
All Sources
Cost of Sales
Expenses
Assets
1
$17,450,000
$15,200,000
$ 4,500,000
$ 55,000,000
2
25,200,000
20,000,000
4,000,000
80,000,000
3
9,150,000
7,000,000
1,500,000
28,250,000
4
780,000
300,000
100,000
4,750,000
5
11,500,000
8,900,000
4,250,000
25,500,000
6
6,800,000
3,400,000
2,000,000
12,000,000
7
2,100,000
1,000,000
900,000
10,000,000
Total
$72,980,000
$55,800,000
$17,250,000
$215,500,000
Revenue minimum:
$ 72,980,000 ´ 10%
=
$ 7,298,000
Asset minimum:
$215,500,000 ´ 10%
=
$21,550,000
Passed
Passed
Passed
Profit/Loss
Revenue
Asset
Segment
Operating Profit
Operating Loss
Test?
Test?
Test?
1
$2,250,000
Yes
Yes
Yes
2
$1,200,000
Yes
Yes
Yes
3
650,000
Yes
Yes
Yes
4
380,000
5
1,650,000
Yes
Yes
Yes
6
1,400,000
Yes
7
200,000
Total
$3,830,000
$3,900,000
´ 10%
Profit/Loss Minimum
$ 390,000
75% Test
Revenue-Unaffiliated
US
$ 800
Canada
450
Chile
600
Spain
280
France
300
$2,430
$3,130 = $2,348
portion of business
54. Egan Company, a publicly-traded company, divides its operations into several operating
segments. Determine which of the following segments are reportable and reconcile the reportable segments to
the consolidated revenues and profits.
External Revenues
Intersegment Revenues
Expenses
Assets
Travel agency
$ 621,000
$ 700,000
$ 1,597,000
$ 1,540,000
Hotels
4,543,000
644,000
2,315,000
7,787,000
Amusement parks
2,400,000
220,000
1,570,000
1,940,000
Theater
2,180,000
116,000
2,640,000
1,441,000
Pro soccer team
700,000
–
898,000
1,340,000
Corporate-level items
100,000
–
250,000
200,000
Total
$10,544,000
$1,680,000
$9,270,000
$14,248,000
Revenue to unaffiliated customers
$10,544,000
Intersegment revenues
1,680,000
Corporate-level items (a)
(100,000)
Combined revenue
$12,124,000
External Revenues
Intersegment Revenues
Travel agency
$ 621,000
$ 700,000
$ 1,597,000
$ –
$276,000
Hotels
4,543,000
644,000
2,315,000
2,872,000
–
Amusement parks
2,400,000
220,000
1,570,000
1,050,000
–
Theater
2,180,000
116,000
2,640,000
–
344,000
Pro soccer team
700,000
–
898,000
–
198,000
Total
$3,922,000
$818,000
Total Revenues
Total Revenue
Profit/Loss
Assets
Travel agency
$1,321,000
Yes
Yes
Hotels
5,187,000
Yes
Yes
Yes
Amusement parks
2,620,000
Yes
Yes
Yes
Theater
2,296,000
Yes
Yes
Pro soccer team
700,000
Consolidated revenue
$10,544,000
External revenue of reportable segments (b)
$ 9,744,000
55. Explain the difference in the independent and integral viewpoints of accounting for interim periods. Which
method best describes the accepted accounting practice for interim financial reporting?
56. The management of Trident, Inc. is trying to determine if three of the company’s nonreportable segments
should be combined into one single segment for reporting purposes. In what five ways must these segments be
similar in order to be reported as one?
57. Discuss the criteria emphasized in the “management approach” that is used to define operating segments.
58. The following lists account titles found on the books of Icell Corporation:
a.
Research and Development
b.
Inventory
c.
Annual Bonuses
d.
Unfavorable Materials Usage Variance
Required:
Discuss how each of these items is accounted for in interim financial statements.
59. For purposes of interim reporting, US-GAAP permits certain modifications to year-end inventory rules.
Required:
Comment on the acceptability of the following independent situations concerning inventory valuation for an
interim period:
a.
Management believes that since its firm does not have a perpetual inventory system, it would be too costly to take a physical inventory.
Consequently, management has suggested to the accounting department that they estimate ending inventory.
b.
Since the LIFO inventory base was liquidated in the first quarter, management has recommended that the accounting department switch to
FIFO valuation of inventory.
c.
Since the first quarter is a slow period for a manufacturing firm, management has suggested that the unfavorable volume variances from
the firm’s standard cost system be deferred until year end.
a.
Gross profit and other sound methods of estimating inventory are permitted.
b.
Changing inventory methods must be justified. Switches are rare. Liquidation of a base layer of inventory generally is not an acceptable
a.
Research and Development: This account, under normal fiscal-year policies, would normally be expensed in the current period. For
interim purposes, the account balance may be allocated among those interim periods of the current year that benefit.
recovers. This option extends only until year end. Also, there may be an allowance for LIFO replacement.
c.
Annual Bonuses: A portion of estimated annual bonuses must be allocated to each interim period of the current year. Failure to recognize
such bonuses on an interim basis would reduce the predictive value of the interim data.
interim period in which it occurs.
60. Stidham Company is a large international company with diversified operating segments. These segments
include the following:
61. In addition to disclosures about reportable segments, companies are required to provide enterprise-wide
disclosures. Describe the information included in enterprise-wide disclosures.
If information regarding product groups and/or geographic areas is not provided as part of the segmental
disclosures, such information must be provided on an enterprise-wide basis as an additional disclosure if
practical. The disclosures are required even if there is only one reportable segment. The enterprise is required
to: