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Test Bank for Advanced Accounting-10th Edition-Fischer

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Test Bank for Advanced Accounting-10th Edition-Fischer

SAMPLE

Chapter 12—Interim Reporting and Disclosures about Segments of an Enterprise

MULTIPLE CHOICE

1.The primary emphasis of interim reporting is on:

a.

interim cash flow

b.

the interim statement of financial position

c.

interim retained earnings

d.

interim income data

ANS: D DIF: E OBJ: 12-1

2.Which of the following best describes the proper accounting for interim financial reports?

a.

The interim period is viewed as an integral part of the annual accounting period.

b.

The interim period is viewed as a distinct, independent accounting period.

c.

Interim net income should be determined by using the same principles as those for the annual accounting period.

d.

Net income should be computed on the cash basis except for sales, cost of goods sold, and depreciation.

ANS: A DIF: M OBJ: 12-1

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?

a.

cost of goods sold is calculated on a historical cost basis only

b.

the interim cost of goods sold includes the replacement cost of temporarily liquidated inventory

c.

cost of goods sold is not adjusted for any changes due to liquidation of LIFO inventory

d.

any of the effects of liquidation are deferred until year end

ANS: B DIF: M OBJ: 12-2

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?

a.

A $37,500 loss recognized in the first quarter and no recovery recognized in the second quarter.

b.

A $150,000 loss recognized in the first quarter and a $90,000 recovery in the second quarter.

c.

A $150,000 loss recognized in the first quarter and a $50,000 recovery in the second quarter.

d.

No loss recognized in the first quarter and no recovery recognized in the second quarter.

ANS: D DIF: D OBJ: 12-2

5.For interim reporting, which of the following statements is true?

a.

Under a standard cost system, unplanned or unanticipated variances should be recognized in the quarter in which they occur.

b.

Under the LIFO method, recognition of layer liquidations, thought to be temporary, are postponed by using replacement cost in the calculation of interim cost of goods sold.

c.

Under the lower of cost or market determination of ending inventory, a gain may not be recognized in an interim period.

d.

All of these statements are true.

ANS: B DIF: M OBJ: 12-2

6.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?

a.

$37,500 and $37,500

b.

$50,000 and $50,000

c.

$0 and $0

d.

$100,000 and $0

ANS: C DIF: M OBJ: 12-2

7.In order to generate interim financial reports that contain a reasonable portion of annual expenses, which of the following statements is true?

a.

an allocation of a portion of an annual bonus would be made as an interim adjustment

b.

any adjustments for inventory shrinkage would be deferred to year end

c.

the allowance for uncollectible accounts receivable will be revised at year end

d.

None of the above are true

ANS: A DIF: E OBJ: 12-2

8.Which of the following statements is NOT true concerning the determination of the effective tax rate to be used for interim reporting?

a.

Tax rate changes should not be accounted for retroactively.

b.

The effective tax rate for the entire year should be estimated.

c.

The effective tax rate should reflect anticipated tax credits.

d.

The estimated tax rate should reflect extraordinary items.

ANS: D DIF: E OBJ: 12-3

9.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%

a.

$3,750

b.

$15,000

c.

$15,750

d.

$20,000

ANS: C DIF: M OBJ: 12-3

10.Nonordinary items resulting in income or loss

a.

include unusual but not infrequent gains.

b.

are treated the same as ordinary items when calculating the effective tax rate.

c.

are always treated as a total group when calculating the effective rate for the quarter.

d.

are always excluded from interim reporting.

ANS: A DIF: E OBJ: 12-4

11.Which of the following statements about interim reporting is false?

a.

If a company reports year-to-date financial information for the current year, it also must report the last twelve month-to-date information.

b.

Under some circumstances, a company can restate the financial information of an earlier current-year quarter.

c.

Tax benefits arising from earlier interim periods in the current year can be carried forward to the current interim period to offset tax expense.

d.

The total of all nonordinary losses in the current quarter multiplied by the effective tax rate equals the amount of tax expense to be allocated among those losses.

ANS: A DIF: M OBJ: 12-3 | 12-4

12.The incremental income tax effect utilized to determine the tax effect of an extraordinary item is calculated by:

a.

applying the estimated effective tax rate against the amount of the extraordinary item

b.

the difference between the gross tax calculated on continuing operations and the gross tax on income from all sources, before tax credits are applied.

c.

the difference between the estimated net tax calculated on the projected annual income from continuing operations and the estimated net tax calculated on projected annual income, including the non-ordinary items, after tax credits have been considered

d.

none of the above.

ANS: C DIF: M OBJ: 12-4

13.Which of the following best describes how the tax benefit resulting from the extraordinary loss in an interim period is recognized?

a.

The tax benefit is recognized in the period in which it occurs using the estimated effective rate.

b.

The tax benefit is recognized in the period in which it occurs using the average tax rate for all income.

c.

The tax benefit is allocated over the current and remaining periods using the estimated effective rate.

d.

The tax benefit is recognized only if, more likely than not, the loss may be offset against income.

ANS: D DIF: E OBJ: 12-4

14.Which of the following best describes the treatment given a change in accounting principles made during the second quarter?

a.

The cumulative effect should be recognized in the quarter in which the decision to change is made.

b.

Regardless of the quarter of change, the recognition is deferred until year end.

c.

All prior interim periods are retrospectively restated.

d.

Interim periods prior to the period of change are not restated.

ANS: C DIF: M OBJ: 12-3

15.Which of the following items should be disclosed with interim data?

a.

basic and diluted earnings per share

b.

contingent items

c.

changes in accounting estimates

d.

all of the above

ANS: D DIF: E OBJ: 12-1

16.When a company makes a second quarter decision to discontinue a segment, the first quarter tax expense:

a.

Results are not restated.

b.

is split between the tax expense calculated on restated quarter one income from continuing operations and the discontinued segment by subtracting the tax expenses calculated on the restated first quarter income from the original tax expense calculated for the first quarter, before the decision was made.

c.

is used to determine the incremental tax effect.

d.

is used to calculate the effective tax rate for the discontinued segment.

ANS: B DIF: M OBJ: 12-3

17.The acquisition of a paper mill by a large publishing company is an example of

a.

horizontal integration.

b.

vertical integration.

c.

diversification.

d.

consolidation.

ANS: B DIF: E OBJ: 12-5

18.In determining if two operating segments may be combined into one, which of the following factors should be considered?

a.

similarities regarding profit margins

b.

whether the nature of the products and services is similar

c.

whether there is a similar amount of intracompany sales

d.

whether there is a similar number of employees

ANS: B DIF: E OBJ: 12-5

19.Which of the following is NOT considered when determining whether an operating segment qualifies as a reportable segment?

a.

revenue of the segment

b.

the assets of the segment

c.

the number of foreign offices

d.

the absolute amount of its profit or loss

ANS: C DIF: E OBJ: 12-6

20.Which of the following is not a limitation on the number of reportable segments?

a.

Consistency, i.e., the number of reportable segments this period, must be the same as last period.

b.

Usually the number of segments should not exceed 10.

c.

At least 75% of the combined revenue of sales to unaffiliated firms should be traceable to reportable segments.

d.

None of the above is a limitation.

ANS: A DIF: M OBJ: 12-6

21.In determining whether a segment should be reported, a profit and loss test can be used. The test selects segments for reporting by:

a.

only including profitable segments.

b.

comparing the absolute value of a segment’s profit or loss to 10% of all segments cumulative profit or cumulative loss, whichever is higher.

c.

comparing the absolute value of a segment’s profit or loss to 10% of all segments combined profits and losses.

d.

comparing the profit or loss of a segment to 10% of all segment external revenue.

ANS: B DIF: M OBJ: 12-6

22.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

a.

horizontally-integrated company.

b.

vertically-integrated company.

c.

diversified company.

d.

conglomerate.

ANS: B DIF: E OBJ: 12-5

23.The management approach to segmental reporting

a.

focuses on how management organizes information for internal decision making.

b.

requires that the company’s chief executive officer decide what segments will be reported.

c.

separates the costs of management from the costs of operations to determine segment profit or loss.

d.

is required only in the United States.

ANS: A DIF: M OBJ: 12-5

Scenario 12-1

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 intersegments sales

7,000,000

Total intersegment sales

1,200,000

Consolidated total assets

50,000,000

Total assets of all segments

45,000,000

24.Refer to Scenario 12-1. The minimum amount of revenues a segment must have to qualify as reportable is ____.

a.

$700,000

b.

$800,000

c.

$820,000

d.

The answer cannot be determined from the information given.

ANS: C DIF: D OBJ: 12-6

25.Refer to Scenario 12-1. The minimum amount of profit or loss a segment must have to qualify as reported is ____.

a.

$100,000

b.

$135,000

c.

$150,000

d.

The answer cannot be determined from the information given.

ANS: D DIF: D OBJ: 12-6

26.Refer to Scenario 12-1. The minimum amount of assets a segment must have to qualify as reportable is ____.

a.

$4,500,000

b.

$5,000,000

c.

$37,500,000

d.

The answer cannot be determined from the information given.

ANS: A DIF: M OBJ: 12-6

27.Refer to Scenario 12-1. For Ansfield, Inc. to report a significant portion of its financial information as segments, its segments, in total, must represent

a.

$37,500,000 in assets.

b.

$6,000,000 in revenues.

c.

$1,125,000 in operating income before taxes.

d.

The answer cannot be determined from the information given.

ANS: B DIF: M OBJ: 12-6

28.With regard to major customers, which of the following items is not true?

a.

If it qualifies, the federal government is considered a single major customer.

b.

The total amount of the sales to each major customer must be disclosed.

c.

The names of the major customers must be disclosed.

d.

The identity of the segments making the sales must be disclosed.

ANS: C DIF: M OBJ: 12-7

29.Which of the following statements about required disclosures in segmental reporting is not true?

a.

No more than ten segments may be reported.

b.

The name of each major customer does not have to be disclosed.

c.

Even if there is only one reportable segment, the company must report revenues from external customers for each product or service or each group of related products or services.

d.

Segmental information must be included in interim reporting.

ANS: A DIF: M OBJ: 12-7

30.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?

a.

Combined external segment revenues for reportable segments exceed 75% of internal and external segment revenues.

b.

Total internal and external segment revenue exceeds 75% of total consolidated revenue.

c.

Total external segment revenue of the reportable segments exceeds 75% of consolidated revenue.

d.

Total segment assets of the reportable segments exceeds 75% of total consolidated assets.

ANS: C DIF: M OBJ: 12-6

PROBLEM

1.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.

ANS:

Units sold  750 + 300 + 250 – 200 = 1100

Cost of goods sold:

300 units × $25/unit

$  7,500

250 units × $28/unit

$  7,000

550 units × $20/unit

$11,000

300 units × ($30-$20)/unit

$  3,000

 

$28,500

DIF: M OBJ: 12-2

2.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.

ANS:

a.

Insurance expense: $1,000 × 3 = $3,000 or $12,000 ÷ 4 = $3,000

   

b.

Gain recognized in current quarter: $10,000

   

c.

Research and development expenses: $15,000 × 1/4 = $3,750

   

d.

Interest expense accrued: 100,000 × .08 × 1/4 = $2,000

   

e.

Loss recognized in current quarter: $36,000 – $18,00 = $18,000

DIF: E OBJ: 12-2

3.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%

$100,000-200,000

22%

$200,000-460,000

28% + 5% surtax

$460,000 and above

30%

Required:

Determine the tax expense for the first quarter, assuming that taxable income is $65,000.

ANS:

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

DIF: E OBJ: 12-3

4.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 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%

$100,000-200,000

22%

$200,000-460,000

28%

$460,000 and above

30%

Required:

Determine the tax expense for the first quarter, assuming that taxable income is $85,000.

ANS:

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

$15,000

  100,000  .22

22,000

  161,250  .28

  45,150

 

$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

DIF: M OBJ: 12-3

5.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. The 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 was $234,000.

Required:

In good form, prepare the first-quarter income statement and statement of retained earnings for Aanstad.

ANS:

Aanstad Inc.

Income Statement

For the First Quarter 20X1

   

Sales

$750,000

Cost of goods sold

(502,500)

Gross profit

$247,500

Selling and administrative expenses*

(114,000)

Income from operations before taxes

$133,500

Income tax expense

    33,375

Net income

$  100,125

   

  *$75,000 + $30,000 + $9,000 = $114,000

 

Aanstad Inc.

Statement of Retained Earnings

For the First Quarter 20X1

   

Retained earnings at the end of quarter 4, 20X0

$234,000

Net income

100,125

Retained earnings at the end of quarter 1, 20X1

$334,125

(the change in depreciation method is handled prospectively; no cumulative effect is measured)

DIF: M OBJ: 12-2

6.Good Time, Inc. is a worldwide manufacturer of toys and games. In accordance with generally accepted accounting principles, quarterly statements are prepared. At the end of the first quarter of 20X2, the following data have been collected from the financial records:

a.

Sales were $14,680,000.

   

b.

Expenses related directly to the sales were $10,600,000, of which $9,500,000 related to the cost of goods sold.

   

c.

Good Time, Inc. employs the LIFO method for inventory valuation and has liquidated a portion of its beginning inventory. The liquidation was in the amount of $600,000, which is included in the cost of goods sold of $9,500,000, and the cost to replace this inventory will be $1,400,000.

   

d.

Other transactions during the first quarter were as follows:

 

(1)

Research and development costs were incurred in the amount of $4,000,000 and are expected to benefit equally the next 3 years.

 

(2)

Advertising costs were $75,000, of which one-third related to the first-quarter sales.

 

(3)

There was a gain on the early extinguishment of debt in the amount of $1,115,000.

Assume that Good Time, Inc. had 500,000 shares of common stock outstanding throughout the first quarter.

Required:

In good form, present the quarterly income statement of Good Time, Inc. (assume an effective income tax rate of 40%).

ANS:

Good Time, Inc.

Income Statement

For the 3-Month Period Ended March 31, 20X1

     

Sales

 

$14,680,000

Cost of goods sold

 

  10,300,0001

Gross profit

 

$  4,380,000

Expenses:

   

     Selling

$1,100,000

 

     Research

1,000,000

 

     Advertising

       25,000

    2,125,000

Income from continuing operations before

   

     income taxes and extraordinary items

 

$  2,255,000

Provision for income taxes

 

       902,000

Income from continuing operations

   

     before extraordinary items

 

$  1,353,000

Extraordinary gain on early extinguishment

   

     of debt (less applicable income taxes

   

     of $446,000)

 

       669,000

Net income

 

$  2,022,000

     

Earnings Per Share:

   

Income before extraordinary gain

$2.706

 

Gain on early extinguishment of debt

  1.338

 

Net income

$4.044

 
     

1($9,500,000 – $600,000 + $1,400,000)

   

DIF: D OBJ: 12-2

7.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%

$100,000-200,000

22%

$200,000-460,000

28%

$460,000 and above

30%

Required:

Calculate the first and second quarter interim tax expenses on continuing income and on the non-ordinary item.

ANS:

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

         

Gross Tax*

34,800   

66,400   

 

29,300

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:

Qtr1:

100,000 × .15

15,000

 

  90,000 × .22

19,800

   

34,800

     

Qtr2:

100,000 × .15

15,000

 

100,000 × .22

22,000

 

105,000 × .28

29,400

   

66,400

     

Qtr2-All:

100,000 × .15

15,000

 

  65,000 × .22

14,300

   

29,300

Tax Summary Schedule:

   

Effective

 
 

              Income   

Tax

              Tax Expense       

 

Qtr

YTD

        Rate

YTD

Prior

Qtr

Continuing:

         

   Qtr1

55,000

55,000

10.2%

5,610

0

5,610

   Qtr2

85,000

140,000

16.7%

23,380

5,610

17,770

 

Non-Ord Item:

         

   Qtr2

(140,000)

(140,000)

**    

(37,100)

0

(37,100)

 

** Incremental tax effect of the below the line item is calculated by taking the difference between the net tax calculated on continuing operations and the net tax calculated on all sources:

 
 

Net Tax-Continuing Operations

$50,900

 

Net Tax-Income from All Sources

  13,800

 

Incremental Benefit of the loss

$37,100

DIF: D OBJ: 12-3 | 12-4

8.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%

$100,000-200,000

22%

$200,000-460,000

28%

$460,000 and above

30%

Required:

Calculate the first and second quarter interim tax expenses on continuing income.

ANS:

   

Pre-tax income

 

Tax Expense (Benefit)

Period

Inc Type

Current

YTD

Effective%

YTD

Previous

Current

Q1

ordinary

   25,000

   25,000

11.58%

   2,896

            

   2,896

Q2

ordinary

   55,000

   80,000

13.38%

10,704

     2,896

   7,808

Q1-R

ordinary

   20,000

   20,000

10.10%

   2,020

            

   2,020

Q2-R

ordinary

   55,000

   75,000

13.07%

   9,803

     2,019

   7,784

               
               

EFFECTIVE TAX RATE:

         
 

Q1

Q2

Q1-R

Q2-R

     

previous

            

   25,000

            

    20,000

     

current

   25,000

   55,000

   20,000

    55,000

     

YTD act

   25,000

   80,000

   20,000

    75,000

     

Projected

   95,000

   65,000

   85,000

    65,000

     

Taxable

120,000

145,000

105,000

  140,000

     

Gross tax*

   19,400

   24,900

   16,100

    23,800

     

Credits

    (5,500)

    (5,500)

    (5,500)

     (5,500)

     

Net tax

   13,900

   19,400

   10,600

    18,300

     

Effec %

11.58%

13.38%

10.10%

13.07%

     
               

Gross tax calculations:

         

Q1

(100,000×15%)+(20,000×22%)

     

Q2

(100,000×15%)+(45,000×22%)

     

Q1-R

(100,000×15%)+(5,000×22%)

     

Q2-R

(100,000×15%)+(40,000×22%)

     

.DIF: D OBJ: 12-3 | 12-4

9.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.

ANS:

   

Pre-tax income

 

Tax Expense (Benefit)

Period

Inc Type

Current

YTD

Effective%

YTD

Previous

Current

Q1

ordinary

   30,000

   30,000

23.61%

   7,083

            

   7,083

Q1-R

ordinary

   35,000

   35,000

23.86%

   8,351

            

   8,351

 

CECAP*

   50,000

   50,000

 

12,500

            

12,500

Q2

ordinary

   20,000

   55,000

23.86%

13,123

     8,351

   4,772

* the cumulative effect of the change in depreciation will be reported as a net-of-tax adjustment to the earliest-reported retained earnings balance. The incremental tax on the cumulative effect is $12,500.

EFFECTIVE TAX RATE:

 
 

Q1

Q1-R

Q2

Q1

30,000

   35,000

   35,000

Q2

          

            

   20,000

YTD act

30,000

   35,000

   55,000

Projected Total

90,000

110,000

110,000

exempt

  (5,000)

    (5,000)

    (5,000)

Taxable income

85,000

105,000

105,000

statutory rate

25.00%

25.00%

25.00%

Tax

21,250

   26,250

   26,250

Effective rate

23.61%

23.86%

23.86%

effective rate = tax ÷ total financial income

DIF: M OBJ: 12-3 | 12-4

10.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%

ANS:

 

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   

01

N/A   

(10,000)2

Estimated effective tax rate

34.5%

0%

36.0%

8.33%

1

The YTD loss cannot be offset by projected income that is not “more likely than not.” No carryback income is available for offset.

2

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.

DIF: M OBJ: 12-3

11.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 biotech 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 nonelectronics 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.

ANS:

   

   Income (Loss)   

 

Type of

Current

Year to

Effective

Quarter

Income

  Period

    Date

Tax Rate

First

Continuing Operation

  30,000

  30,000

19.44%1

First, Restated

Continuing Operation

100,000

100,000

23.61%2

 

Discontinued Operation

(70,000)

(70,000)

       

Second

Continuing Operation

40,000

140,000

22.78%4

 

Discontinued Operation

(35,000)

(105,000)

25.00%

 

Loss on Disposal

(48,000)5

(48,000)

25.00%

 
   

Tax Expense (Benefit)

 

Type of

Year

Previously

Current

Quarter

Income

to Date

  Reported

  Period

First

Continuing Operation

$    5,832

        0

  5,832

First, Restated

Continuing Operation

23,610

0

23,610

 

Discontinued Operation

(17,778)3

0

(17,778)

Second

Continuing Operation

31,892

23,610

8,282

 

Discontinued Operation

(26,250)

(17,778)

(8,472)

 

Loss on Disposal

(12,000)

0

(12,000)

1$90,000 × .25 = $22,500;

2($90,000 + $270,000) × .25 = $90,000;

3$23,610 – $5,832 = $17,778

4

5($40,000) estimated loss on disposal + ($8,000) second-quarter operating loss subsequent to measurement date = ($48,000)

DIF: D OBJ: 12-3 | 12-4

12.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.

ANS:

Tax benefit of nonordinary loss ($24,100 – $38,100) = $(14,000)

Tax expense of nonordinary income ($(4,200) – $(14,000)) = $9,800

           

Total Income

   
           

Excluding

 

All Non-

   

Ordinary

 

Total

 

Nonordinary

 

ordinary

   

  Income

 

Income

 

     Losses

 

Items (net)

Pretax Income

 

$135,000

 

$120,000

 

$170,000

   

Tax Expense

               

  (benefit)

 

28,300

 

24,100

 

38,100

 

4,200

   

(A)

 

(B)

 

(C)

   

A  $50,000 × .15

$  7,500

        50,000 × .22

11,000

        35,000 × .28

    9,800

 

$28,300

   

B  $50,000 × .15

$  7,500

        50,000 × .22

11,000

        20,000 × .28

    5,600

 

$24,100

   

C  $50,000 × .15

$  7,500

        50,000 × .22

11,000

        70,000 × .28

  19,600

 

$38,100

 

D = Tax on all nonordinary items (net) ($24,100 – $28,300) = $(4,200)

 

Incremental tax expense (benefit) traceable to:

 

D

All nonordinary items: ($24,100 – $28,300) = ($4,200)

   

(Step 1: B – A)

 
 

E

All nonordinary losses: ($24,100 – $38,100) = ($14,000)

   

(Step 2: B – C)

 
 

F

All nonordinary gains: ($4,200) – ($14,000) = $9,800

   

(Step 3: D – E)

DIF: D OBJ: 12-4

13.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

         

ANS:

       

        Tax Expense

   

           Income (Loss)   

 

            (Benefit)    

     

Year

Tax

Year

 

Case

Quarter

Current

to Date

Rate

to Date

Current

A

1

$(50,000)

$(50,000)

0

0

0

 

2

30,000

(20,000)

0

0

0

 

3

40,000

20,000

15%

3,000

3,000

 

4

40,000

60,000

16.7%

10,000

7,000

 

B

1

(50,000)

(50,000)

15%

(7,500)

(7,500)

 

2

30,000

(20,000)

15%

(3,000)

4,500

 

3

40,000

20,000

15%

3,000

6,000

 

4

40,000

60,000

16.7%

10,000

7,000

 

C

1

15,000

15,000

6%a

900

900

 

2

(35,000)

(20,000)

6%

(1,200)

(2,100)

 

3

(75,000)

(95,000)

b

(4,200)

(3,000)

 

4

25,000

(70,000)

6%

(4,200)

0

 
 
 

bBecause the YTD loss of $95,000 is greater than the annual loss of $70,000, the YTD tax benefit must be based on the YTD loss.

DIF: M OBJ: 12-3 | 12-4

14.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.

ANS:

   

           Income (Loss)       

   

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%

 
   

   Tax Expense (Benefit)

   

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)

Third

Continuing Operation

62,080

37,280

24,800

 

Discontinued Operation

(10,600)

(11,660)

1,060

Fourth

Continuing Operation

90,680

62,080

28,600

 

Discontinued Operation

(10,120)

(10,600)

480

DIF: D OBJ: 12-3 | 12-4

15.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?

ANS:

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

DIF: E OBJ: 12-6

16.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.

ANS:

Revenue test:

 

$2,430   

Unaffiliated sales

 

     310   

Intersegment sales

 

$2,740   

Combined revenue

 

×    10%

 
 

  274   

Revenue minimum

 

All segments exceed revenue minimum.

Further tests are unnecessary since the revenue test qualifies all segments as reportable

Other procedures (optional):

Profit/Loss test

   
   

Profit

Loss

 

     US

$200

 
 

     Canada

150

 
 

     Chile

240

 
 

     Spain

 

$  30

 

     France

        

  110

   

$590

$140

       
 

Minimum for profit or loss  $590 × 10%  $59

 

All segments except for Spain exceed the minimum profit or loss criterion.

   

Asset test

 

$1,120 × 10% = $112 minimum level

 

All segments except France meet minimum asset criterion.

     

75% Test

 
   

Revenue-Unaffiliated

 

     US

  800

 

     Canada

450

 

     Chile

600

 

     Spain

280

 

     France

     300

   

$2,430

 

75% Total Corporate Revenue: 75% × $3,130 = $2,348

 

Reportable segments represent a significant portion of business

DIF: M OBJ: 12-6

17.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

ANS:

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

 

No

No

No

     5

 

1,650,000

Yes

Yes

Yes

     6

1,400,000

 

Yes

No

No

     7

     200,000

_______

No

No

No

Total

$3,830,000

$3,900,000

     
   

×     10%

     

Profit/Loss Minimum

  390,000

     

Segments 1, 2, 3, 5, and 6 are the reportable segments.

DIF: M OBJ: 12-6

ESSAY

1.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?

ANS:

The three segments must be similar in each of the following areas:

1.

The nature of the products and services

2.

The nature of the production process

3.

The type or class of customer for their products and services

4.

The method used to distribute their products or provide their services

5.

The nature of the regulatory environment, if any

DIF: E OBJ: 12-5

2.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.

ANS:

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 reason for a change. However, if the liquidation is temporary, replacement cost can be used to determine the cost of goods sold.

   

c.

Variances that are planned and expected to be absorbed by year end may be deferred at interim reporting dates.

DIF: M OBJ: 12-2

3.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?

ANS:

The independent or distinct approach views the interim period as a separate period from that of the annual period. Consequently, accounting procedures used for the interim financial statements should be the same as those applied for annual purposes.

The integral approach views the interim period as an integral part of the annual period. Therefore, adjustments and estimates should be made so that predictions of annual amounts may be made.

The integral approach is the accepted viewpoint under current accounting practices.

DIF: E OBJ: 12-1

4.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.

ANS:

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.

   

b.

Inventory: This account is handled as the normal year-end account, except for certain variations. Specifically, the inventory may be valued by the gross profit method, and a write-down of inventory to lower of cost or market can be recovered in later interim periods if the market 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.

   

d.

Unfavorable Materials Usage Variance: The treatment of this account is based on whether it is expected to be absorbed by year end. If a usage variance has arisen in an interim period and is expected to be reflected in annual statements, the variance should be recognized in the interim period in which it occurs.

DIF: E OBJ: 12-1 | 12-2