Beams Aa13e TB 15

Advanced Accounting, 13e, Global Edition (Beams et al.
)
Chapter 15 Segment and Interim Financial Reporting
15.1 Multiple Choice Questions
1) Similar operating segments may be combined if the segments have similar economic characteristics.
Which one of the following is a similar economic characteristic under GAAP?
A) The segments' management teams
B) The tax reporting law sections
C) The distribution method for products or services
D) The expected rates of return and risk for the segments' productive assets
Answer: C
Objective: LO15.2 Apply the threshold tests to identify reportable operating segments: the revenue test, the asset
test, and the operating-profit test.
Difficulty: Easy
AACSB: Analytical thinking
2) Which of the following conditions would not indicate that two business segments should be classified
as a single operating segment?
A) They have similar amounts of intersegment revenues or expenses.
B) They have a similar distribution method for products.
C) They have similar production processes.
D) They have similar products or services.
Answer: A
Difficulty: Easy
3) GAAP requires that segment information be reported

A) by geographics, without regard to size of the segment.
B) by geographics, without regard to industry or product-line.
C) however management organizes the enterprise into units for internal decision-making and
performance-evaluation purposes.
D) by industry or product-line, without regard to geographics.
Answer: C
Objective: LO15.1 Understand how firms use the management approach to identify potentially reportable operating
segments.
Difficulty: Easy
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4) GAAP requires disclosures for each reportable operating segment for each of the following, except for
A) Revenues.
B) Depreciation expense.
C) R&D expenditures.
D) Extraordinary items.
Answer: C
Objective: LO15.4 Understand the types of disclosure information for segments and the reasons that the levels of
disclosure may vary across companies.
Difficulty: Easy
5) What is the threshold for reporting a major customer?

A) 5 percent of revenues
B) 5 percent of profits
C) 10 percent of revenues
D) 10 percent of profits
Answer: C
Objective: LO15.6 Know the required enterprise-wide disclosures with respect to products and services, geographic
areas of operation, and major customers.
Difficulty: Easy
6) Cole Company has the following 2014 financial data:
Consolidated revenue per income statement $800,000

Intersegment sales 200,000
Intersegment transfers 100,000
Combined revenues of all segments $1,100,000
Cole Company should add segments if

A) the sum of its segments' external revenue does not exceed $600,000.
B) the sum of its segments' external revenue does not exceed $825,000.
C) the sum of its segments' revenue including intersegment revenue does not exceed $600,000.
D) the sum of its segments' revenue including intersegment revenue does not exceed $825,000.
Answer: A
Explanation: A) (75% of $800,000 = $600,000)
Objective: LO15.3 Determine the reporting of any additional segments using the 75 percent external-revenue test.
Difficulty: Moderate
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7) Which of the following is NOT a quantitative threshold for determining a reportable segment?
A) Segment assets are 10% or more of the combined assets of all operating segments.
B) The absolute value of a segment's profit or loss is 10% or more of the greater of (1) the combined
reported profit of all operating segments that reported a profit or (2) the absolute value of the combined
reported loss of all operating segments that reported a loss.
C) Segment reported revenue, including intersegment revenues, is 10% or more of the combined revenue
(both internal and external) of all operating segments.
D) Segment residual profit after the cost of equity is 10% or more of the combined residual profit of all
operating segments.
Answer: D
Difficulty: Easy
8) For an operating segment to be considered a reporting segment under the revenue threshold, its
reported revenue must be 10% or more of
A) the combined enterprise revenues, eliminating all relevant intracompany transfers and balances.
B) the combined revenues, excluding intersegment revenues, of all operating segments.
C) the combined revenues, including intersegment revenues, of all operating segments.
D) the consolidated revenue of all operating segments.
Answer: C
Difficulty: Easy
9) An enterprise has eight reporting segments. Five segments show an operating profit and three
segments show an operating loss. In determining which segments are classified as reporting segments
under the operating profits test, which of the following statements is correct?
A) The test value for all segments is 10% of consolidated net profit.
B) The test value for profitable segments is 10% or more of those segments reporting a profit, and the test
value for loss segments is 10% or more of those segments reporting a loss.
C) The test value for loss segments is 10% of the greater of (a) the absolute value of the sum of those
segments reporting losses, or (b) 10% of consolidated net profit.
D) The test value for all segments is 10% of the greater of (a) the absolute value of the sum of those
segments reporting profits, or (b) the absolute value of the sum of those segments reporting losses.
Answer: D
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10) Dott Corporation experienced a $100,000 extraordinary loss in the second quarter of 2014 in their East
Coast operating segment. The loss should be recognized
A) only at the consolidated report level at the end of the year.
B) entirely in the second quarter of 2014 in the East Coast operating segment.
C) in equal amounts allocated to the remaining three quarters of 2014 at the corporate level.
D) in equal amounts allocated to the remaining three quarters of 2014 of the East Coast segment.
Answer: B
Objective: LO15.7 Understand the similarities and differences in the reporting of operations in an interim versus an
annual reporting period.
11) Which one of the following operating segment disclosures is NOT required by GAAP?
A) Total Assets
B) Equity
C) Intersegment sales
D) Extraordinary items
Answer: B
Difficulty: Easy
12) Which one of the following operating segment information items is NOT directly named by GAAP to
be reconciled to consolidated totals?
A) Assets
B) Liabilities
C) Revenues
D) Profit or loss
Answer: B
Objective: LO15.5 Understand what segment disclosures are reconciled to the consolidated amounts.
Difficulty: Easy
13) What is the purpose of interim reporting?

A) Provide shareholders with more timely information
B) Provide shareholders with more accurate information
C) Provide shareholders with more extensive detail about specific accounts and transactions
D) Provide shareholders with more current audited information
Answer: A
Difficulty: Easy
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14) The following table is provided in the disclosures for interim reporting by Bigg Company, regarding
the location of their assets.
United States $1,860,000

Mexico 1,270,000
Canada 880,000
Brazil 440,000
Other 50,000
Based on the table, which of the following statements is true?

A) Only the U.S. and Mexico divisions would be reportable geographic divisions.
B) The U.S., Mexico and Canada divisions would be reportable geographic divisions.
C) All geographic divisions would be reportable, except for "other."
D) All geographic divisions would be reportable.
Answer: B
Explanation: B) Total assets for all divisions = $4,500,000, therefore those divisions with at least $4,500,000
× 10% or $450,000 would be considered reportable geographic divisions.
15) Jacana Company uses the LIFO inventory method. During the second quarter, Jacana experienced a
100-unit liquidation in its LIFO inventory at a LIFO cost of $430 per unit. Jacana considered the
liquidation temporary and expects to replace the units in the third quarter at an estimated replacement
cost of $460 a unit. The cost of goods sold computation in the interim report for the second quarter will
A) include the 100 liquidated units at the $460 estimated replacement unit cost.
B) include the 100 liquidated units at the $430 LIFO unit cost.
C) be understated by $3,000.
D) be overstated by $3,000.
Answer: A
16) How does GAAP view interim accounting periods?

A) As discrete units for which net income may be separately determined
B) As integral units of the entire year for which each interim period is an essential part of an annual
period
C) As integral units of the entire year with each interim period as an independent accounting period
D) As discrete units of the entire year using the same principles that are applied to the annual period
Answer: B
Difficulty: Easy
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17) In general, GAAP encourages the identification of reportable segments based on the following:
A) Reported segments must account for at least 75% of all external and inter-segment sales.
B) Reported segments must ideally account for at least 75% of all sales, unless there are many smaller
divisions and separate reporting would create less clarity in reporting.
C) If there are more than 10 reportable segments, the company should consider additional aggregation of
their segments.
D) Reported segments must account for 100% of the external sales, but only 75% of external and inter-
segment sales.
Answer: C
Difficulty: Easy
18) Sandpiper Corporation paid $120,000 for annual property taxes on January 15, 2014, and $20,000 for
building repair costs on March 10, 2014. Total repair expenses for the year were estimated to be $200,000,
and are normally accrued during the year until incurred. What is the total amount of property tax and
repair expense to be reported in Sandpiper's first quarter 2014 interim income statement?
A) $ 50,000
B) $ 80,000
C) $100,000
D) $140,000
Answer: B
19) The estimated taxable income for Shebill Corporation on January 1, 2014, was $80,000, $100,000,
$100,000 and $120,000, respectively, for each of the four quarters of 2014. Shebill's estimated annual
effective tax rate was 30%. During the second quarter of 2014, the estimated annual effective tax rate was
increased to 34%. Given only this information, Shebill's second quarter income tax expense was
A) $30,000.
B) $34,000.
C) $37,200.
D) $61,200.
Answer: C
Objective: LO15.8 Compute interim-period income tax expense.
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20) On January 5, 2014, Eagle Corporation paid $50,000 in real estate taxes for the calendar year. In March
of 2014, Eagle paid $180,000 for an annual machinery overhaul and $10,000 for the annual CPA audit fee.
What amount was expensed for these items on Eagle's quarterly interim financial statements?
A)
Quarter 1 Quarter 2 Quarter 3 Quarter 4
$202,500 $12,500 $12,500 $12,500
B)
$195,000 $15,000 $15,000 $15,000
C)
$67,500 $57,500 $57,500 $57,500
D)
$60,000 $60,000 $60,000 $60,000
Answer: D
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15.2 Exercises
1) The accountant for Baxter Corporation has assigned most of the company's assets to its three segments
as follows:
Electronics $1,760,000
Hardware 3,420,000
Plumbing 490,000
Total $5,670,000
The unassigned assets consist of $430,000 of unallocated goodwill and $270,000 of assets attached to the
corporate headquarters. For internal decision-making purposes, goodwill is not assigned to the segments
and the assets assigned to the corporate headquarters are allocated equally to the operating segments.
Required:
1. What is the proper threshold value to use in determining which of the operating segments shown
above are reporting segments?
2. Which of the operating segments are considered reporting segments?

Answer:
Requirement 1
GAAP allows the assets of the corporate headquarters to be included in the segments if the assets are
included in the measure of the segment's assets that are reviewed by the chief operating decision maker.
This interpretation would justify the exclusion of goodwill and inclusion of the corporate headquarters
assets. The threshold value would be 10% times the sum of ($5,670,000 + $270,000) or $594,000.
Requirement 2
Using the criterion established in Requirement 1, Electronics and Hardware would both be considered
reporting segments. Plumbing would not be a reporting segment because it falls below the $594,000
threshold value. ($490,000 + $270,000/3 = $580,000).
AACSB: Application of knowledge
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2) For internal decision-making purposes, Dashwood Corporation's operating segments have been
identified as follows:
Revenues Operating
(includes Profit Identifiable
Operating Segment intersegment or Loss Assets
revenues)
Appliances $1,100,000 $(150,000) $1,200,000
Clothing 1,300,000 (750,000) 400,000
Lawn and Garden 850,000 150,000 150,000
Auto Accessories 1,000,000 100,000 200,000
Service Contracts 650,000 (50,000) 100,000
Catalog Sales 2,300,000 50,000 500,000
Home Furnishings 2,800,000 250,000 1,000,000
Tools 2,400,000 300,000 250,000
$12,400,000 $(100,000) $3,800,000
Revenues of the segments are external, with the exception of tools, which sold $400,000 to other segments,
and Appliances, which sold $200,000 to other segments.
Required:
1. In applying the "revenue" test to identify reporting segments, what is the test value for Dashwood
Corporation?
2. Using the "revenue" test, which of Dashwood's operating segments will also be reportable segments?
Answer:
Requirement 1
In the revenue test, there is no separation of revenue earned from sales to other segments, thus the test
value to be used is 10% of the total revenues listed, or $12,400,000 × 10% = $1,240,000.
Requirement 2
Reportable segments are Clothing, Catalog Sales, Home Furnishings and Tools. The revenue from these
four segments does not exceed 75% of consolidated revenue of $11,800,000, which equals $8,850,000. As a
result, another operating segment, Appliances, must be reportable.
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3) For internal decision-making purposes, Calam Corporation's operating segments have been identified
as follows:
Operating
Profit Identifiable
Operating Segment Revenues or Loss Assets
Appliances $110,000 $(15,000) $120,000
Clothing 130,000 (75,000) 40,000
Lawn and Garden 85,000 15,000 15,000
Auto Accessories 100,000 10,000 20,000
Catalog Sales 230,000 5,000 50,000
Home Furnishings 280,000 25,000 100,000
Tools 240,000 30,000 25,000
$1,240,000 (10,000) $380,000
Required:
1. In applying the "operating profit or loss" test to identify reporting segments, what is the test value for
Calam Corporation?
2. Using the "reported profit or loss" test, which of Calam's operating segments will also be reporting
segments?
Answer:
Requirement 1
If the absolute value of the total segments showing operating losses, $95,000, is more than the absolute
value of the profitable segments, $85,000, then the absolute value of the loss segments, when multiplied
by 10%, would become the test value for each segment. The $95,000 is multiplied by 10% to get $9,500,
which is the test value for both the profitable and loss segments.
Requirement 2
Using the test value of $9,500 for profit and loss of the segments, only the Service Contracts and Catalog
Sales segments would not be considered reportable segments.
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4) For internal decision-making purposes, Elom Corporation's operating segments have been identified as
follows:
Operating
Profit Identifiable
Operating Segment Revenues or Loss Assets
Appliances $110,000 $(15,000) $120,000
Lawn and Garden 85,000 15,000 15,000
Auto Accessories 100,000 10,000 20,000
Catalog Sales 230,000 5,000 50,000
Corporate ________ ________ 25,000
$590,000 $10,000 $240,000
Corporate assets are typically allocated back evenly to the segments for internal analysis purposes.
Required:
1. In applying the "asset" test to identify reporting segments, what is the test value for Elom Corporation?
2. Using the "asset" test, which of Elom's operating segments will also be reporting segments?
Answer:
Requirement 1
Total identifiable assets of $240,000 is multiplied by 10% to determine the test value of $24,000.
Requirement 2
Based on the answer to Requirement 1, Appliances, Auto Accessories and Catalog Sales would be
reporting segments because their identifiable segment assets (which would include an additional $5,000,
or 1/5 of $25,000 corporate assets), meets or exceeds the test value of $24,000. Note that Corporate is not a
reportable segment, but that the assets are allocated to the other divisions.
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5) The following data relate to Falcon Corporation's industry segments:
Sales to
External Intersegment
Industry Segment Customers Sales Assets
Oil Exploration $80,000 $310,000
Refinery 240,000 720,000
Plastics 20,000 $20,000 120,000
Chemicals 220,000 160,000 980,000
Solar Power 20,000 75,000 270,000
Totals $580,000 $255,000 $2,400,000
Required:
1. Which of Falcon's operating segments would be considered reporting segments under the "revenue"
test?
2. Which of Falcon's operating segments would be considered reporting segments under the "asset" test?
Answer:
Requirement 1
The test value is 10% of the combined revenues of all operating segments including intersegment
revenues, or, 10% × $835,000 or $83,500. Based on this test value, Refinery, Chemicals, and Solar Power
would be the reporting segments because each of these segments has more than $83,500 in total sales.
Requirement 2
The test value is 10% of the combined identifiable assets or 10% × $2,400,000 or $240,000. Based on this
test value, Oil Exploration, Refinery, Chemicals, and Solar Power would be the reporting segments
because each of these segments has more than $240,000 in segment assets.
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6) For internal decision-making purposes, Falcon Corporation identifies its industry segments by
geographical area. For 2014, the total revenues of each segment are provided below. There are no
intersegment revenues.
Total
Revenues
Canada $22,000,000
United States 76,000,000
Mexico 10,000,000
South America 9,000,000
China 2,000,000
Russia 1,500,000
Australia 3,000,000
European Union 12,000,000
Other European 14,000,000
Total revenues $149,500,000
Required:
1. Which operating segments will be considered reporting segments based on the revenue test?
2. What is the test value for determining whether a sufficient number of segments are reported?
3. What will be the minimum number of segments that must be reported?

Answer:
Requirement 1
The reporting segments will be those segments whose segment revenue is 10% or more of the combined
revenues of all operating segments. The total combined revenue of the operating segments is $149,500,000
and 10% of that number is $14,950,000. Only Canada and the United States will satisfy the 10% revenue
test.
Requirement 2
The appropriate test value is the "75% of consolidated revenues" test which is $112,125,000 ($149,500,000 ×
75%).
Requirement 3
Canada and the United States have combined revenues that total $98,000,000. The next largest segment in
revenues is Other European at $14,000,000 which would get the total revenues to $112,000,000. Falcon
would have to report one additional segment, European Union, to meet the 75% test for revenue.
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7) For internal decision-making purposes, Geogh Corporation identifies its industry segments by
geographical area. For 2014, the total revenues of each segment are provided below. There are no
intersegment revenues.
Total
Revenues
Canada $980,000
United States 1,410,000
Mexico 1,260,000
South America 430,000
China 710,000
Russia 660,000
Australia 370,000
European Union 1,220,000
Other European 1,650,000
Total revenues $8,690,000
Required:
1. Which operating segments will be considered reporting segments based on the revenue test?
2. What is the test value for determining whether a sufficient number of segments are reported?
3. What will be the minimum number of segments that must be reported?

Answer:
Requirement 1
The reporting segments will be those segments whose segment revenue is 10% or more of the combined
revenues of all operating segments, or $869,000 ($8,690,000 × 10%). Canada, United States, Mexico,
European Union and Other European will satisfy the 10% revenue test.
Requirement 2
The appropriate test value is the "75% of consolidated revenues" test which is $6,517,500 ($8,690,000 ×
75%).
Requirement 3
The five segments identified under Requirement 1 total $6,520,000 and therefore just meet the amount
required by the 75% test. No further segments will need to be reported.
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8) The following data relate to Elle Corporation's industry segments. (Elle HQ represents the corporate
headquarters). All other segments are geographical sales segments.
Attribute Europe Russia China Japan Elle HQ

External sales $35,000 $24,000 $33,000 $0 $0
Intersegment
Sales 2,000 1,000 4,000 0 0
Expenses 27,000 18,000 29,000 5,000 12,000
Assets assigned 20,000 22,000 30,000 14,000 15,000
Income from
Equity investee 5,000
Required:
1. Prepare a report which reconciles the reportable segment profits to total consolidated profits assuming
that corporate expenses are not allocated to the operating segments.
2. Prepare a report which reconciles the reportable segment profits to total consolidated profits assuming
that corporate expenses are allocated evenly among the operating segments.
Answer:
Requirement 1
Total profit or loss for reportable segments

Europe:($35,000 + $2,000 - $27,000) = $10,000
Russia:($24,000 + $1,000 - $18,000) = 7,000
China:($33,000 + $4,000 - $29,000) = 8,000
Japan: (-$5,000) (5,000)
Total operating profit from reportable segments $20,000
Plus: Income from equity investee 5,000
Less: Intersegment revenues (7,000)
Less: Headquarter's expenses (12,000)
Equals: Consolidated net income $6,000
Requirement 2
Total profit or loss for reportable segments

Europe:($35,000 + $2,000 - $27,000 - $3,000) = 7,000
Russia:($24,000 + $1,000 - $18,000 - $3,000) = 4,000
China:($33,000 + $4,000 - $29,000 - $3,000) = 5,000
Japan: (-$5,000 - $3,000) = (8,000)
Operating profit from reportable segments $8,000
Plus: Income from equity investee 5,000
Less: Intersegment revenues (7,000)
Equals: Consolidated net income $6,000
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9) Illiana Corporation has several accounting issues with respect to its interim financial statements for the
first quarter of calendar 2014.
Required:
For each of the independent situations given below, state whether or not the method proposed by Illiana
is acceptable. Justify each answer with appropriate reasoning.
1. Illiana will not perform a physical inventory at the end of the calendar quarter. It intends to estimate
the cost of sales by using the gross profit inventory method.
2. Illiana grants volume discounts to its customers based upon their total annual purchases. The discounts
are calculated on a sliding scale ranging from 1% to 8%. The amount of discount applied will
progressively increase for a customer as the cumulative purchase total for the customer increases during
the year. Illiana will use the average rate of discounts earned for each customer in the prior year as the
expected discount rate for the current year.
3. At the beginning of the current quarter, Illiana incurred a large loss on the sale of some of its
marketable securities. It intends to distribute the loss evenly to each of the four calendar quarters.
4. Illiana incurs maintenance costs during its year-end holiday shut down, but has minimal maintenance
costs during the rest of the year. It intends to deduct one-fourth of the yearly estimated cost on its interim
income statement.
Answer:
1. GAAP specifically permits the use of the gross profit method for estimating ending inventory and cost
of sales in the preparation of interim financial statements.
2. GAAP permits the use of reasonable estimates based upon the experience of prior periods for
allocating annual expenses to interim periods. This integral approach is permitted but not required.
3. Since the entire loss has been realized in the first quarter, Illiana has no justifiable basis for allocating
the loss to the other quarters. GAAP requires the discrete approach for a permanent loss in value; if the
loss could not be deferred at year end to another period, then it may not be deferred to another interim
period. It must show the entire loss in the first quarter.
4. GAAP permits the allocation of annual costs to the interim periods to which they relate.
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10) Jeale Corporation is preparing its interim financial statements for the third quarter of calendar 2014.
The following information was provided for the preparation of the statements:
1. Credit sales for the quarter $1,700,000

2. Cash sales for the quarter 800,000
3. Inventories, July 1 (FIFO cost method) 250,000
4. Cash purchases of inventory during the quarter 400,000
5. Inventory purchases made on account for the quarter 650,000
6. Estimated cost of goods sold ratio 45%
7. Selling and general administrative expenses paid 111,000
8. Effective corporate tax rate 28%
9. Loss on sale of securities sold on June 30, 2014 75,000
10. Annual insurance premiums paid on August 1 (the 84,000
anniversary date of the policy) (Last year's insurance expense
is included in general administrative expenses.)
Additional information:
At the end of the year, Jeale accrues its annual pension and depreciation expenses which amount to
$60,000 and $42,000, respectively.
Required:
Prepare Jeale's interim income statement for the third quarter of calendar year 2014.
Answer: Jeale Corporation
Interim Income Statement
For the Calendar Quarter Ending on September 30, 2014
Sales Revenue ($1,700,000 + $800,000) $2,500,000

Less:
Cost of Goods Sold (2,500,000 × 45%) 1,125,000
Selling and general and administrative expenses 111,000
Insurance expense ($84,000/12 months × 2 months) 14,000
Depreciation expense ($42,000/4) 10,500
Estimated pension expense ($60,000/4) 15,000
Income before taxes $1,224,500
Income tax expense ($1,224,500 × 28%) 342,860
Net income $ 881,640
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11) Krull Corporation is preparing its interim financial statements for the third quarter of calendar 2014.
The following trial balance information is available for third quarter:
Account Debit Credit

Cash $98,000
Accounts Receivable 285,000
Inventory 750,000
Fixed assets 600,000
Accounts Payable $300,000
Common Stock 50,000
Retained Earnings 80,000
Sales 4,400,000
Administrative expense 312,000
Cost of goods sold 2,650,000
Loss on sale of securities sold on July 30 75,000
Annual equipment overhaul costs paid on August 1 60,000
Totals $4,830,000 $4,830,000
Additional information
At the end of the year, Krull distributes annual employee bonuses and charitable donations that are
estimated at $40,000, and $12,000, respectively. The cost of goods sold includes the liquidation of a
$45,000 base layer in inventory that Krull will restore in the fourth quarter at a cost of $75,000. Effective
corporate tax rate for 2014 is 32%.
Required:
Prepare Krull's interim income statement for the third quarter of calendar 2014.
Answer: Krull Corporation

Interim Income Statement
For the Calendar Quarter Ending on September 30, 2014
Sales Revenue $4,400,000
Less:
Cost of Goods Sold ($2,650,000 + $30,000 LIFO base replacement) 2,680,000
Administrative expenses 312,000
Loss on sale of securities 75,000
Bonus expense ($40,000/4) 10,000
Charitable contribution expense ($12,000/4) 3,000
Maintenance expense ($60,000/4) 15,000
Income before taxes $1,305,000
Income tax expense ($1,305,000 × 32%) 417,600
Net income $887,400
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12) Leotronix Corporation estimates its income by calendar quarter as follows for 2014:
1st 2nd 3rd 4th 2014

Quarter Quarter Quarter Quarter Total
Est. Income $30,000 $40,000 $40,000 $50,000 $160,000
Income tax rates applicable to Leotronix:

From: $ 0 to $50,000 15%
From: $50,001 to $75,000 25%
Over: $75,000 35%
Required:
Determine Leotronix's estimated effective tax rate.
Answer:
Income tax on estimated income
First quarter ($30,000 × 15%) $4,500
Second quarter ($20,000 × 15%) + ($20,000 × 25%) 8,000
Third quarter ($5,000 × 25%) + ($35,000 × 35%) 13,500
Fourth quarter ($50,000 × 35%) 17,500
Total estimated taxes $ 43,500
Effective tax rate = Total estimated taxes divided

by total estimated income = $43,500/$160,000 = 27.19%
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13) Maxtil Corporation estimates its income by calendar quarter as follows for 2014:

Est. Income $40,000 $30,000 $20,000 $20,000 $110,000
Income tax rates applicable to Maxtil:

From: $0 to $50,000 15%
From: $50,001 to $75,000 25%
Over: $75,000 35%
Required:
Determine Maxtil's estimated effective tax rate.
Answer:
Income tax on estimated income
First quarter ($40,000 × 15%) $6,000
Second quarter ($10,000 × 15%) + ($20,000 × 25%) 6,500
Third quarter ($5,000 × 25%) + ($15,000 × 35%) 6,500
Fourth quarter ($20,000 × 35%) 7,000
Total estimated taxes $26,000

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14) Nettle Corporation is preparing its first quarterly interim report. It is subject to a corporate income tax
rate of 20% on the first $50,000 of taxable income and 35% on taxable income above $50,000. Its estimated
pretax accounting income for 2014, by quarter, is:

Est. Income $75,000 $165,000 $143,000 $120,000 $503,000
Nettle expects to earn and receive operating income for the year and does not contemplate any changes in
accounting procedures or principles that would affect its pretax accounting income.
Required:
1. Determine Nettle's estimated effective tax rate for 2014.
2. Prepare a schedule to show Nettle's estimated net income for each quarter of 2014.
Answer:
Requirement 1
Calculation of estimated effective tax rate
First quarter ($50,000 × 20% + $25,000 × 35%) $18,750
Second quarter ($165,000 × 35%) 57,750
Third quarter ($143,000 × 35%) 50,050
Fourth quarter ($120,000 × 35%) 42,000
Total estimated taxes $168,550

Requirement 2
1st 2nd 3rd 4th

Quarter Quarter Quarter Quarter 2014
Y-T-D income $75,000 $240,000 $383,000 $503,000 $503,000
Quarterly income 75,000 165,000 143,000 120,000
Income tax** -25,132 -55,290 -47,918 -40,211 -168,551

Estimated NI $49,868 $109,710 $95,082 $79,789 $334,449
** (Deducted at 33.509%)
21
15) Osprin Corporation has three operating segments, as summarized below:
Capsule Pill Liquid Total

Sales to retailers 25,000 35,000 5,000 65,000
Intersegment sales 4,000 10,000 2,000 16,000
Operating Expenses 10,000 18,000 5,000 33,000
Interest Expense 2,000 3,000 1,000 6,000
Income Tax Expense 4,000 6,000 1,000 11,000
Assets 12,000 3,000 16,000 31,000
Required:
1. Using the revenue test, what is the minimum amount of revenue of a reportable segment?
2. Using the operating profit or loss test, what is the minimum amount of operating profit or loss of a
reportable segment?
3. Using the asset test, what is the minimum amount of assets of a reportable segment?
4. Based on the three tests, which segments will be separately reported?
Answer:
1. Total revenue including intersegment sales = $65,000 + $16,000 = $81,000. The test value limit is $8,100
($81,000 × 10%).
2. The operating profit or loss test includes the operating profit or loss for each segment, which excludes
Interest Expense and Income Tax Expense.
Capsule Pill Liquid Total

Sales to retailers 25,000 35,000 5,000 65,000
Intersegment sales 4,000 10,000 2,000 16,000
Operating Expenses 10,000 18,000 5,000 33,000
Operating Profit 19,000 27,000 2,000 48,000
Total operating profit (all segments had profit; no segments had a loss) = $48,000. The test value limit is
$4,800 ($48,000 × 10%).
3. The assets of all segments combined is $31,000. The test value limit is $3,100 ($31,000 × 10%).
4. Under the revenue test, the Capsule and Pill segments are reportable. The Liquid segment's total sales
($5,000 + $2,000) is $7,000 and does not exceed the limit. Under the operating profit or loss test, the
Capsule and Pill segments are reportable. Under the asset test, the Capsule and Liquid segments are
reportable. Because each segment meets at least one of the three tests, they will all be considered
reportable segments.
22
16) The following information was collected together for the Lawson Company relating to the
preparation of their annual financial statements for 2011. For each item, indicate "yes" or "no" as to
whether the item must be disclosed in the annual report.
________ 1. Names of major customers for all reportable segments

________ 2. Interest revenue and expense for all reportable segments
________ 3. Cost of Goods Sold for all reportable segments
________ 4. Depreciation expense and amortization expense for all reportable segments
________ 5. Revenue from external customers for all reportable segments
________ 6. The basis for aggregating any operating segments to arrive at reporting segments
________ 7. Income tax expense (or benefit) for all reportable segments
________ 8. Total assets for all reportable segments
________ 9. Type of product or service for all reportable segments
________ 10. Extraordinary items for all reportable segments
Answer: 1. no, 2. yes, 3. no, 4. yes, 5. yes, 6. yes, 7. yes, 8. yes, 9. yes, 10. yes
23
17) Quantex Corporation has five operating segments, as summarized below:
Household Industrial Packaging Storage Services

Sales to outside
entities 700,000 4,300,000 400,000 1,700,000 100,000
Intersegment sales 50,000 600,000 800,000 200,000 -0-
Cost of goods sold 300,000 2,700,000 700,000 900,000 -0-
Operating Expenses 200,000 1,300,000 200,000 600,000 30,000
Interest Expense 10,000 40,000 5,000 -0- -0-
Income Tax
Expense 60,000 210,000 70,000 100,000 18,000
Assets 540,000 1,900,000 1,600,000 70,000 32,000
Required:
Determine which of the operating segments of Quantex Corporation are reportable segments for the
period shown.
Answer: Revenue test: Total revenues (external and internal) = $8,850,000 × 10% = $885,000 = test value
limit; therefore Industrial, Packaging and Storage are reportable segments.
Operating Profit test (Sales - COGS - Operating Expenses): Total Operating Profit (no segments have
losses) = $1,920,000 × 10% = $192,000 = test value limit; therefore Household, Industrial, Packaging and
Storage are reportable segments.
Asset test: Total assets of all operating segments = $4,142,000 × 10% = $414,200 = test value limit; therefore
Household, Industrial, and Packaging are reportable segments.
Based on the three tests above, all operating segments meet at least one criteria to be a reportable segment
with the exception of Services. Since the four segments' revenue to external customers totals $7,100,000,
and that is at least 75% of total revenue of all segments to external customers ($7,200,000 × 75% =
$5,400,000), these four segments are satisfactory for disclosure requirements and no additional segments
must be added.
24
18) Rollins Publishing has five operating segments, as summarized below:
Fiction Non-fiction Reference Childrens Periodicals

Sales to outside
entities 870,000 416,000 796,000 236,000 517,000
Intersegment sales -0- -0- 80,000 -0- 50,000
Cost of goods sold 430,000 270,000 290,000 65,000 420,000
Operating Expenses 120,000 89,000 95,000 74,000 238,000
Interest Expense -0- 61,000 -0- -0- 24,000
Income Tax
Expense 80,000 (1,000) 120,000 24,000 (28,000)
Assets 22,000 24,000 29,000 16,000 100,000
Required:
Determine which of the operating segments of Rollins Publishing are reportable segments for the period
shown.
Answer: Revenue test: Total revenues (external and internal) = $2,965,000 × 10% = $296,500 = test value
limit; therefore Fiction, Non-fiction, Reference and Periodicals are reportable segments.
Operating Profit test (Sales - COGS - Operating Expenses): Total Operating Profit of segments with
operating profits (Fiction, Non-fiction, Reference, Children's) = $965,000, and Total Operating Loss of
segments with operating losses (Periodicals) = $(91,000). Since the absolute value of the total operating
profit is greater than the absolute value of the total operating losses, we will use 10% of the total
operating profits as our test value limit = $96,500; therefore Fiction, Reference and Children's are
reportable segments.
Asset test: Total assets of all operating segments = $191,000 × 10% = $19,100 = test value limit; therefore
Fiction, Non-fiction, Reference and Periodicals are reportable segments.
Based on the three tests above, all operating segments meet at least one criteria to be a reportable
segment, therefore all segments must be reported.
25
19) Snodberry Catering has five operating segments, as summarized below:
Wait
Buffet Alcohol Bakery Service Bar Service
Sales to outside entities 26,000 110,000 22,000 24,000 5,000
Intersegment sales -0- 20,000 4,000 -0- 56,000
Cost of goods sold 16,000 50,000 19,000 23,000 69,000
Operating Expenses 9,000 70,000 6,000 2,000 4,000
Interest Expense -0- 5,000 -0- 2,000 1,000
Income Tax Expense -0- 2,000 -0- -0- (3,000)
Assets 2,000 22,000 2,000 1,000 1,000
Required:
Determine which of the operating segments of Snodberry Catering are reportable segments for the period
shown.
Answer: Revenue test: Total revenues (external and internal) = $267,000 × 10% = $26,700 = test value limit;
therefore Alcohol and Bar Service are reportable segments.
Operating Profit test (Sales - COGS - Operating Expenses): Total Operating Profit of segments with
operating profits (Buffet, Alcohol, Bakery) = $12,000, and Total Operating Loss of segments with
operating losses (Wait Service and Bar Service) = $(13,000). Since the absolute value of the total operating
losses is greater than the absolute value of the total operating profits, we will use 10% of the total
operating losses as our test value limit = $1,300; therefore Alcohol and Bar Service (which has an absolute
value of operating loss greater than the test value limit) are reportable segments.
Asset test: Total assets of all operating segments = $28,000 × 10% = $2,800 = test value limit; therefore
Alcohol is a reportable segment.
Based on the three tests above, two operating segments meet at least one criteria to be a reportable
segment (Alcohol and Bar Service). Total Revenue to external customers = $187,000, multiplied by 75% =
$140,250. Since the sales revenue to external customers of the two reportable segments only amounts to
$115,000, at least one more operating segment must be added. By adding Buffet as a reportable segment,
the sales revenue to external customers by the reportable segments would increase to $141,000 which
exceeds the criterion of $140,250.
26
20) Tillman Fabrications has five operating segments, as summarized below:
Wood Plastic Metal Paper Fabric

Sales to outside entities 5,200,000 1,200,000 7,800,000 1,600,000 6,300,000
Intersegment sales 390,000 4,700,000 -0- -0- 750,000
Operating Profit (520,000) (590,000) 1,700,000 190,000 (960,000)
Assets 690,000 450,000 880,000 280,000 760,000
Required:
Determine which of the operating segments of Tillman Fabrications are reportable segments for the
period shown.
Answer: Revenue test: Total revenues (external and internal) = $27,940,000 × 10% = $2,794,000 = test value
limit; therefore Wood, Plastic, Metal, and Fabric are reportable segments.
Operating Profit test: Total Operating Profit of segments with operating profits (Metal and Paper) =
$1,890,000, and Total Operating Loss of segments with operating losses (Wood, Plastic, Fabric) =
$(2,070,000). Since the absolute value of the total operating losses is greater than the absolute value of the
total operating profits, we will use 10% of the total operating losses as our test value limit = $207,000;
therefore Wood, Plastic, Metal and Fabric are reportable segments.
Asset test: Total assets of all operating segments = $3,060,000 × 10% = $306,000 = test value limit; therefore
Wood, Plastic, Metal and Fabric are reportable segments.
Based on the three tests above, four operating segments meet at least one criteria to be a reportable
segment (Wood, Plastic, Metal and Fabric). Total Revenue to external customers = $22,100,000, multiplied
by 75% = $16,575,000. Since the sales revenue to external customers of the four reportable segments
amounts to $20,500,000, the 75% test has been met by those four segments and no further segments must
be included in separate reporting.
15.3 True/False
1) Enterprises must report segment information using the management approach to segmentation.
Answer: TRUE
Objective: LO15.1 Understand how firms use the management approach to identify potentially reportable operating
segments.
Difficulty: Easy
2) Management-approach-based segments are called operating segments.

Answer: TRUE
Difficulty: Easy
27
3) Pensions and corporate headquarters are all part of an operating segment.
Answer: FALSE
4) For reporting purposes, a segment is considered material if its assets are 15 percent or more of the
combined assets of all operating segments.
Answer: FALSE
5) A reconciliation between the segment data and the consolidated information must be provided for the
total of the reportable segments' revenues and the reported consolidated revenues.
Answer: TRUE
6) Enterprises must disclose the existence of major customers; the single customer that accounts for 10
percent or more of the enterprise's revenue.
Answer: TRUE
Objective: LO15.6 Know the required enterprise-wide disclosures with respect to products and services, geographic
areas of operation, and major customers.
7) Interim financial reports provide more timely, extensive information than annual financial reports.
Answer: FALSE
Difficulty: Easy
8) The gross profit method for estimating inventory and cost of goods sold can be used for interim
financial reports if the periodic inventory method is not used and it is too costly to perform an inventory
count.
Answer: FALSE
28
9) If the LIFO method is used for inventory to reduce taxable income, the IRS requires the LIFO method
to be used for financial reporting purposes.
Answer: TRUE
Difficulty: Easy
10) The Securities and Exchange Commission require that quarterly reports be prepared for the
company's stockholders and for filing with the IRS.
Answer: FALSE
29

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Advanced Accounting, 13e, Global Edition (Beams et al.

15.1 Multiple Choice Questions

3) GAAP requires that segment information be reported

5) What is the threshold for reporting a major customer?

6) Cole Company has the following 2014 financial data:

Consolidated revenue per income statement $800,000

Cole Company should add segments if

13) What is the purpose of interim reporting?

United States $1,860,000

Based on the table, which of the following statements is true?

16) How does GAAP view interim accounting periods?

2. Which of the operating segments are considered reporting segments?

3. What will be the minimum number of segments that must be reported?

3. What will be the minimum number of segments that must be reported?

Attribute Europe Russia China Japan Elle HQ

Total profit or loss for reportable segments

Total profit or loss for reportable segments

1. Credit sales for the quarter $1,700,000

Sales Revenue ($1,700,000 + $800,000) $2,500,000

The following trial balance information is available for third quarter:

Account Debit Credit

Answer: Krull Corporation

1st 2nd 3rd 4th 2014

Income tax rates applicable to Leotronix:

Effective tax rate = Total estimated taxes divided

1st 2nd 3rd 4th 2014

Income tax rates applicable to Maxtil:

Effective tax rate = Total estimated taxes divided

1st 2nd 3rd 4th 2014

Effective tax rate = Total estimated taxes divided

1st 2nd 3rd 4th

Y-T-D income $75,000 $240,000 $383,000 $503,000 $503,000

Quarterly income 75,000 165,000 143,000 120,000

Income tax** -25,132 -55,290 -47,918 -40,211 -168,551

Capsule Pill Liquid Total

4. Based on the three tests, which segments will be separately reported?

Capsule Pill Liquid Total

________ 1. Names of major customers for all reportable segments

Household Industrial Packaging Storage Services

Fiction Non-fiction Reference Childrens Periodicals

Wood Plastic Metal Paper Fabric

2) Management-approach-based segments are called operating segments.

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