Chapter 12—Interim Reporting and Disclosures about Segments of
an Enterprise Key
1. The primary emphasis of interim reporting is on:
2. Which of the following best describes the proper accounting for interim financial reports?
3. If a company is utilizing LIFO inventory costing, what might be the effect on the calculation of Cost of
Goods sold in an interim financial statement?
4. During the first quarter, a company’s application of lower of cost or market methods indicated a $150,000
loss from a temporary market decline, which is expected to be restored in the fiscal year. During the second
quarter, the market reversed the decline. Which of the following situations indicates a proper treatment of these
facts?
5. For interim reporting, which of the following statements is true?
6. Saunders Corp., which accounts for inventory using the LIFO method, had 2,000 units in beginning inventory
at a cost of $40 and had purchased 500 more for $43. During the quarter, 1,300 units were sold. It is expected
that the ending inventory at year end will be 1,800 units as Saunders anticipates purchasing additional units for
$45. The excess replacement cost for temporary liquidation for the quarter would be:
7. Saunders Corp., which accounts for inventory using the LIFO method, had 2,000 units in beginning inventory
at a cost of $40 and had purchased 500 more for $43. During the quarter, 1,300 units were sold. It is expected
that the ending inventory at year end will be 1,800 units as Saunders anticipates purchasing additional units for
$45. The debit to cost of goods sold for the quarter would be:
8. Cammy Company had inventory at the end of the first quarter having a cost of $420,000 and a market value
of $410,000. Cammy recognized a $10,000 loss in its first quarter financial statements due to market
declines. At the end of the second quarter, the inventory had a cost of $450,000, and a market value of
$480,000. Cammy’s action in the second quarter should be:
9. Abel Corporation sold equipment in the first quarter of 20X5 at a $150,000 loss. How much of the loss
should appear in the 20X5 second- and third-quarter income?
10. Harrison Company paid the annual fee of $30,000 for an equipment maintenance contract on July 1, the first
day of its second quarter and incurred research costs in the same quarter of $12,000. The research did not
prove to be fruitful. Harrison should recognize the following expense amount in the second quarter:
11. In order to generate interim financial reports that contain a reasonable portion of annual expenses, which of
the following statements is true?
12. Which of the following statements about interim reporting is false?
D. A company should allocate a portion of its estimated year-end inventory adjustment to each interim period.
13. Which of the following statements is not true concerning the determination of the effective tax rate to be
used for interim reporting?
14. Abitz Corporation has the following pretax operating income in its first three quarters of 20X5. The
effective tax rate for each quarter is provided. Determine the third quarter income tax or benefit.
Current
Effective
Quarter
Period
Tax Rate
First
$40,000
25%
Second
(25,000)
25%
Third
50,000
30%
15. The tax benefit associated with a year-to-date operating loss should be recognized if:
16. Nonordinary items resulting in income or loss
17. The incremental income tax effect utilized to determine the tax effect of an extraordinary item is calculated
by:
18. Which of the following best describes how the tax benefit resulting from the extraordinary loss in an interim
period is recognized?
19. When a company makes a second quarter decision to discontinue a segment, the first quarter tax expense:
20. Which of the following best describes the treatment given a change in accounting principles made during
the second quarter?
21. Which of the following items should be disclosed with interim data?
22. The acquisition of a paper mill by a large publishing company is an example of
23. A corporation made up of an automobile manufacturer, a plastics maker, a spark plug manufacturer, a steel
mill, and a battery maker is an example of a
24. The management approach to segmental reporting
25. In determining if two operating segments may be combined into one, which of the following factors should
be considered?
26. Which of the following is not considered when determining whether an operating segment qualifies as a
reportable segment?
27. In determining whether a segment should be reported, a profit and loss test can be used. The test selects
segments for reporting by:
28. It is possible for segments to qualify as reportable, but not represent a material portion of the enterprise.
What test is applied to ensure the segments reported represent a significant portion of enterprise activity?
29. Which of the following is not a limitation on the number of reportable segments?
30. Ansfield, Inc. has several potentially reportable segments. The following financial information has been
determined for the current fiscal year:
Consolidated net income
$ 1,000,000
Operating income before taxes
1,500,000
Net operating income of all segments
1,350,000
Total consolidated revenue
8,000,000
Total revenue of all segments,
excluding intersegment sales
7,000,000
Total intersegment sales
1,200,000
Consolidated total assets
50,000,000
Total assets of all segments
45,000,000
The minimum amount of revenues a segment must have to qualify as reportable is ____.
31. Ansfield, Inc. has several potentially reportable segments. The following financial information has been
determined for the current fiscal year:
Consolidated net income
$ 1,000,000
Operating income before taxes
1,500,000
Net operating income of all segments
1,350,000
Total consolidated revenue
8,000,000
Total revenue of all segments,
excluding intersegment sales
7,000,000
Total intersegment sales
1,200,000
Consolidated total assets
50,000,000
Total assets of all segments
45,000,000
The minimum amount of profit or loss a segment must have to qualify as reported is ____.
32. Ansfield, Inc. has several potentially reportable segments. The following financial information has been
determined for the current fiscal year:
Consolidated net income
$ 1,000,000
Operating income before taxes
1,500,000
Net operating income of all segments
1,350,000
Total consolidated revenue
8,000,000
Total revenue of all segments,
excluding intersegment sales
7,000,000
Total intersegment sales
1,200,000
Consolidated total assets
50,000,000
Total assets of all segments
45,000,000
The minimum amount of assets a segment must have to qualify as reportable is ____.
33. Ansfield, Inc. has several potentially reportable segments. The following financial information has been
determined for the current fiscal year:
Consolidated net income
$ 1,000,000
Operating income before taxes
1,500,000
Net operating income of all segments
1,350,000
Total consolidated revenue
8,000,000
Total revenue of all segments,
excluding intersegment sales
7,000,000
Total intersegment sales
1,200,000
Consolidated total assets
50,000,000
Total assets of all segments
45,000,000
For Ansfield, Inc. to report a significant portion of its financial information as segments, its segments, in total, must represent
34. Which of the following is not required to be disclosed for a reportable segment?
35. A reconciliation of the revenue, profit and loss and asset amounts presented for reportable segments to the
respective consolidated amounts for the entity:
36. Which of the following is not required to be disclosed on an entity-wide basis if it has not been disclosed in
the segment disclosures?
37. With regard to major customers, which of the following items is not true?
38. Abbott Inc. began the year with 750 units of inventory valued at $20 each under LIFO. During the first
quarter, 300 units were purchased at $25 each and another 250 units were purchased at $28 each. Assume that
200 units are on hand at the end of the first quarter and that the current replacement cost is $30 per unit.
Required:
If Abbott plans to have 500 units on hand at year end, determine the cost of goods sold for the first quarter.
39. The following events took place in Morgan Corporation’s second quarter.
a.
An expired insurance policy was replaced by a $12,000, 12-month policy.
b.
Morgan sold marketable securities at a $10,000 gain.
c.
Research and development costs of $15,000, which were expected to benefit the company over the next 12 months, were incurred.
d.
On the first day of the quarter, Morgan signed a one-year, $100,000 bank note carrying an 8% interest rate.
e.
Used equipment with a book value of $36,000 was sold for $18,000.
Required:
Determine the effect of the above events on Morgan Corporation’s second-quarter income.
Insurance expense: $12,000 12 x 3 = $3,000
b.
Gain recognized in current quarter: $10,000
d.
Interest expense accrued: 100,000 ´ .08 ´ 3/12 = $2,000
e.
Loss recognized in current quarter: $36,000 – $18,000 = $18,000
40. A list of selected information from Aanstad Inc. follows. Regarding its first-quarter performance for 20X1,
a.
Sales were $750,000.
b.
Cost of goods sold was $502,500.
c.
Total depreciation expense was $75,000 (part of selling and administrative expenses). As of the beginning of the first quarter, Aanstad
began using straight-line depreciation. Had they used the old accelerated method, the current depreciation would have been $80,000.
d.
Other selling and administrative expenses were $30,000 excluding advertising expense. Two quarters of advertising were prepaid at
$18,000 at the start of the first quarter.
e.
The cost of goods sold includes a favorable volume variance of $100,000. The volume variance is expected to be offset by the slow
activity anticipated in the fourth quarter.
f.
Aanstad’s estimated effective tax rate is 25%.
g.
Aanstad’s retained earnings at the end of the fourth quarter, 20X0 were $234,000.
Required:
In good form, prepare the first-quarter income statement.
Aanstad Inc.
Income Statement
For the First Quarter 20X1
Sales
$750,000
Cost of goods sold (1)
(502,500)
Gross profit
$247,500
Selling and administrative expenses (2)
(114,000)
Income from operations before taxes
$133,500
Income tax expense (3)
33,375
Net income
$100,125
(1) Price and volume variances that are planned and expected to be absorbed should be deferred at interim reporting dates.
(2) Depreciation $75,000 + Selling and administrative $30,000 + Advertising ($18,000 / 2) $9,000 = $114,000
41. Lancaster Inc. expects to have taxable income of $275,000 for 20X1 and a tax credit of $12,250. Assume
that the graduated tax rate schedule is as follows:
$1-$100,000
15%
$100,001-200,000
22%
$200,001-460,000
28% + 5% surtax
$460,001 and above
30%
Required:
Determine the tax expense for the first quarter, assuming that taxable income is $65,000.
Estimated annual tax:
$100,000 ´ .15
$15,000
100,000 ´ .22
22,000
75,000 ´ .33
24,750
$61,750
Tax credit
(12,250)
Total tax
$49,500
Effective rate = $49,500 $275,000 = 18%
First-quarter tax expense = $65,000 ´ .18 = $11,700
42. Scott Inc. expects to have financial income of $375,000 for 20X1 and estimates annual tax credits of
$22,500. Included in Scott’s income is interest income on municipal securities, which is not taxable, totaling
$45,000 and meals and entertainment expenses of $62,500 of which 50% are not deductible under current tax
code. Assume that the graduated tax rate schedule is as follows:
$1-$100,000
15%
$100,001-200,000
22%
$200,001-460,000
28%
$460,001 and above
30%
Required:
Determine the tax expense for the first quarter, assuming that taxable income is $85,000.
Income subject to tax:
Projected income
$375,000
Permanent difference: tax-exempt municipal securities income
(45,000)
Permanent difference: non-deductible meals and entertainment
31,250
Income Subject to Tax
$361,250
Estimated annual tax:
$100,000 .15
100,000 .22
161,250 .28
$82,150
Tax credit
(22,500)
Net tax
$59,650
Effective rate: $59,650 $375,000 = 15.9%
First-quarter tax expense $85,000 15.9% $13,515
43. For each of the following independent cases, determine the estimated effective tax rate to be used for the
current quarter’s interim statements.
Case A
Case B
Case C
Case D
Year-to-date income (loss)
$ 80,000
$(20,000)
$(30,000)
$(120,000)
Projected income (loss)
for the balance of the
year
120,000
60,000
130,000
60,000
Permanent tax differences
(tax-free income)
10,000
10,000
Estimated annual tax
credits
7,000
2,000
Prior 2 years’ income (loss)
N/A
(30,000)
N/A
20,000
Prior 2 years’ tax rate
N/A
35%
N/A
35%
Is projected income “more
likely than not”?
N/A
No
Yes
Yes
Deferred tax liabilities
expected to reverse
in next 20 years
N/A
N/A
N/A
3,000
Current statutory tax rate
40%
40%
40%
40%
Case A
Case B
Case C
Case D
Year-to-date income (loss)
$ 80,000
$(20,000)
$ (30,000)
$(120,000)
Projected income (loss) for
the balance of the year
120,000
60,000
130,000
60,000
Projected annual income
$200,000
$ 40,000
$100,000
$ (60,000)
Permanent difference
(10,000)
—
(10,000)
—
Taxable income
$190,000
$ 40,000
$ 90,000
$ (60,000)
Tax (benefit) at statutory
rate (40%)
$76,000
$16,000
$36,000
$(24,000)
Tax credits
(7,000)
(2,000)
Net tax expense (benefit)
$69,000
$16,000
$36,000
$(26,000)
Benefit limited to
N/A
N/A
Estimated effective tax rate
34.5%
0%
36.0%
8.33%
The YTD loss cannot be offset by projected income that is not “more likely than not.” No carryback income is available for offset.
When the YTD loss exceeds the annual loss, the tax benefit and effective tax rate must be based on the YTD loss.
$20,000 (prior 2 years) ´ 35% + $3,000 (deferred tax credits) = $10,000.
44. Allee Co. has pretax, ordinary income of $7,000 and $38,000 in the first and second quarters, respectively.
The projected ordinary income for the third and fourth quarters is $60,000 and $30,000. Occurring in the second
quarter is a pretax, nonordinary loss of $50,000 and pretax nonordinary income of $35,000. The statutory tax
rate is 15% on the first $50,000, 22% on the next $50,000, and 28% on income over $100,000.
Required:
Determine the tax impact traceable to the nonordinary income and nonordinary loss.
Tax benefit of nonordinary loss ($24,100 – $38,100) = $(14,000)
Tax expense of nonordinary income ($(4,200) – $(14,000)) = $9,800
45. Cracker Corporation’s first-quarter 20X4, pretax income is $55,000. The company anticipates an annual tax
credit of $15,500. Cracker is projecting income for the remaining three quarters of $135,000. For the second
quarter of 20X4, Cracker reports $85,000 of pretax income with a projected pre-tax income for the remainder of
the year of $165,000. Cracker does not have any permanent differences between taxable income and financial
income.
In the second quarter, Cracker suffers an uninsured loss of one of its warehouses. The loss is determined to be
unusual in nature and infrequent in occurrence. The amount of the loss is determined to be $140,000.
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 and on the non-ordinary item.
Gross Tax Schedule:
Non-Ord
Qtr1
Qtr2
Loss
Qtr2-All
YTD Actual Income
$ 55,000
$140,000
Projected Remainder
135,000
165,000
Projected Annual Income
$190,000
$305,000
$(140,000)
$165,000
Tax Credits
(15,500)
(15,500)
(15,500)
Net Tax
19,300
50,900
13,800
Effective Tax Rate
10.2%
16.7%
*Gross Tax Calculation:
100,000 ´ .15
90,000 ´ .22
34,800
100,000 ´ .15
100,000 ´ .22
105,000 ´ .28
66,400
100,000 ´ .15
65,000 ´ .22
29,300
