chapter 13, modern advanced accounting-review q & exr

CHAPTER 13REPORTING FOR COMPONENTS;

INTERIM REPORTS; REPORTING FOR THE SEC

The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 13–1 Wabash Company (20 minutes, easy)

Computation of segment profit or loss for four operating segments.

Pr. 13–2 Cregar Company (40 minutes, medium)

Preparation of corrected income statements for three years to display discontinued operations.

Pr. 13–3 Lang Corporation (45 minutes, medium)

Computation of effective combined federal and state income tax rates for interim reports. Journal entries for income taxes expense in interim periods.

Pr. 13–4 Bixler Company (50 minutes, medium)

Comparative income statements for enterprise with discontinued operations and unusual (but not extraordinary) items.

Pr. 13–5 Draco Company (45 minutes, medium)

Income statement for enterprise with discontinued operations and extraordinary item.

Pr. 13–6 Principia Corporation (60 minutes, strong)

Preparation of summary of information about income statement and balance sheet items of four operating segments.

Pr. 13–7 Lobeck Company et al. (60 minutes, strong)

Partial income statement displaying disposal of an operating segment; journal entries for four quarters’ income taxes expense; journal entries for temporary depletion of lifo inventory layer during an interim period.

ANSWERS TO REVIEW QUESTIONS

1. An operating segment is a component of an enterprise:

(1) That engages in business activities for which it may earn revenues and incur expenses

(2) Whose operations are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and

(3) For which discrete financial information is available.

2. No, the concept of segment reporting is not consistent with the theory of consolidated financial statements. Under that theory, a single set of financial statements is considered to present fairly the financial position, operating results, and cash flows of a single economic entity, regardless of the legal or operating segment structure of the entity. Segment reporting, in contrast, encompasses separate financial disclosures for each reportable operating segment of a single economic entity.

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 13 389

3. The format established by the FASB for reporting the disposal of an operating segment of an entity is adding a gain or deducting a loss on disposal to or from income from continuing operations. The gain or loss on disposal includes both income or loss from operations of the segment prior to its disposal and the gain or loss from disposal of the segment’s net assets. Applicable income taxes are applied to the gain or loss.

4. APB Opinion No. 28, “Interim Financial Reporting,” requires use of the same accounting principles in interim financial statements as in fiscal year financial statements for costs and expenses associated directly with or allocated to products sold or services rendered. The Opinion provides four exceptions to the general rule for enterprises using the gross margin method, last-in, first-out inventory costing method, lower-of-cost-or-market inventory valuation method, or standard cost method of computing cost of goods sold for interim financial reports.

5. If an inventory replacement cost decline on an interim date is considered to be temporary, it is disregarded in the preparation of interim financial reports. If a replacement cost decline on an interim date is expected to be applicable at the end of the fiscal year, it is recognized in cost of goods sold for the interim period. If an inventory replacement cost write-down in one interim period is offset by an inventory replacement cost increase in a subsequent interim period, a gain is recognized in the subsequent period to the extent of the loss recognized in preceding interim periods of the fiscal year.

6. APB Opinion No. 28, “Interim Financial Reporting,” provides that at the end of each interim period a business enterprise should make its best estimate of the effective income tax rate expected to be applicable for the full fiscal year. The estimated rate is used to account for income taxes expense on a current year-to-date basis. The effective income tax rate should reflect anticipated foreign tax rates, percentage depletion, and other available income tax planning alternatives.

7. Six U.S. statutes administered by the SEC are as follows (only four are required):

(1) Securities Act of 1933

(2) Securities Exchange Act of 1934

(3) Public Utility Holding Company Act of 1935

(4) Trust Indenture Act of 1939

(5) Investment Company Act of 1940

(6) Investment Advisers Act of 1940

8. Form 10-K is an annual report currently filed with the SEC within 60 days after the close of each fiscal year by companies subject to the periodic reporting requirements of the Securities Exchange Act of 1934. Form 8-K is a current report filed with the SEC within four business days after the occurrence of certain specified events or events elected to be disclosed by the companies.

9. If stockholders of a business enterprise are to vote on authorization of issuances of securities, modification or exchanges of securities, or business combinations, the enterprise’s proxy statement must include financial statements of the enterprise, as required by the Securities Exchange Act of 1934.

10. In Codification of Financial Reporting Policies, the SEC expressed an intention to concentrate on pronouncements on disclosures in financial statements and schedules, while acknowledging that pronouncements of the FASB provide substantial authoritative support for the accounting principles established by the FASB.

11. Regulation S-X provides accountants guidance for the form and content of financial statements and schedules required to be filed with the SEC.

12. Regulation S-K of the SEC provides guidance for the non-financial statement disclosure requirements in the various Forms filed with the SEC.

13. Financial Reporting Releases are pronouncements issued by the SEC that state its views on financial accounting matters.

The McGraw-Hill Companies, Inc., 2006390 Modern Advanced Accounting, 10/e

14. The SEC permits, but does not require, disclosure of financial forecasts in filings with the SEC. However, the SEC has undertaken a program to encourage voluntary filings of financial forecasts in reports to the SEC.

SOLUTIONS TO EXERCISES

Ex. 13–1 1. b2. c [$60,000 – ($150,000 x 0.20) = $30,000]3. b [$125,000 – ($180,000 x 0.25) = $80,000]4. a5. a6. d [($50,000 + $15,000 + $150,000 + $1,750,000) – $1,000,000 = $965,000]7. c8. d [$700,000 + ($60,000 x 0.60) + ($150,000 x 0.60) = $826,000]9. a10. d11. a12. a13. b14. d15. a16. b [($170,000 x 0.45) – ($130,000 x 0.40) = $24,500]17. a18. b19. e20. c21. a

Ex. 13–2 Computation of revenue and segment profit of operating segments of Polyglot Company for year ended June 30, 2006 (amounts in thousands):

Operating SegmentAlpha Beta Gamma

Revenue:Sales to unaffiliated customers $400 $500 $600Intersegment sales 50 40 30

Total revenue $450 $540 $630 Expenses:

Traceable:Intersegment purchases $ 60 $ 20 $ 40Other 200 300 500

Nontraceable (allocated in ratio of 4:5:6) 40 50 60 Total expenses $300 $370 $600

Segment profit $150 $170 $ 30

Ex. 13–3 Computation of segment profit for Rinker Company’s Segment No. 1 for 2006:

Segment sales $900,000Less: Segment traceable expenses 400,000

Subtotal $500,000Less: Allocated nontraceable expenses ($600,000 x 0.60) 360,000Segment profit $140,000


Ex. 13–4 Computation of allocation of nontraceable expenses of Coopers Company for year ended June 30, 2006:

Chemicals segment

Sporting goods

segmentNet sales percentages

($1,400,000/$2,000,000 and $600,000/$2,000,000) 70% 30%Payroll percentages

($150,000/$250,000 and $100,000/$250,000) 60 40Average plant assets and inventories percentages

($710,000/$1,000,000 and $290,000/$1,000,000) 71 29Totals 201 % 99 %

Average percentages ( 3) 67 % 33 % Allocation of nontraceable expenses

($310,000 x 0.67 and $310,000 x 0.33, respectively) $207,700 $102,300

Ex. 13–5 Computations of revenue, expenses, and segment profit or loss for operating segments of Canton Company for year ended Apr. 30, 2006:

Operating Segment

Operating Segment

Operating Segment

A B CRevenue:

Net sales to unaffiliated customers $500,000 $300,000 $200,000Intersegment transfers out 80,000 40,000 20,000

Total revenue $580,000 $340,000 $220,000 Expenses:

Traceable expenses $400,000 $100,000 $200,000Intersegment transfers in 30,000 60,000 50,000

Nontraceable expenses ( , , and

) 50,000 30,000 20,000

Total operating expenses $480,000 $190,000 $270,000 Segment profit (loss) $100,000 $150,000 $ (50,000 )

Ex. 13–6 a. Computation of Crossley Company’s income from continuing operations for year ended Dec. 31, 2006:

Pre-tax financial income ($600,000 0.60) $1,000,000Add: Loss from discontinued operations ($250,000 – $100,000) 150,000Less: Operating income of discontinued operations prior to disposal (90,000 ) Income from continuing operations before income taxes $1,060,000Less: Income taxes expense ($1,060,000 x 0.40) 424,000 Income from continuing operations $ 636,000

b. Computation of Crossley Company’s total income taxes for year ended Dec. 31, 2006:

Pre-tax financial income (from a) $1,000,000Income tax rate 0.40Total income taxes (expense and allocated) $ 400,000


Ex. 13–7 Partial income statement for Tovar Company for year ended Aug. 31, 2006:

Income from continuing operations $384,000 (1)Discontinued operations:

(Loss) from operations of discontinued Wallis Division, including $30,000 loss on disposal (less applicable income taxes of $8,000) (12,000 )(2)

Net income $372,000

(1) $640,000 x 0.60 = $384,000

(2) [($200,000 – $150,000) – $40,000 – ($330,000 – $300,000)] x 0.60

Ex. 13–8 Partial income statement for Dispo Company for year ended June 30, 2006:

Income from continuing operations ($1,000,000 x 0.60) $600,000Discontinued operations:

(Loss) from operating of discontinued Division 105, including $60,000 loss on disposal (less applicable income taxes of $92,000) (138,000 )

Net income $462,000

Ex. 13–9 Partial income statement for Downsize Company for year ended Nov. 30, 2006:

Income from continuing operations before income taxes $500,000Less: Income taxes expense 200,000 Income from continuing operations $300,000Discontinued operations:

(Loss) from operations of discontinued Webb Division, including $40,000 loss on disposal (less applicable income taxes of $12,000) (18,000 )

Net income $282,000

Ex. 13–10 Partial income statement for Reducto Company for year ended April 30, 2006:

Income from continuing operations before income taxes $600,000Less: Income taxes expense 240,000 Income from continuing operations $360,000Discontinued operations:

(Loss) from operations of discontinued Woeful Division, including $70,000 loss on disposal (less applicable income taxes of $108,000) (162,000 )

Net income $198,000


Ex. 13–11 Reporting of items in Luigi Company’s quarterly income statements for 2006:Quarter ended

Mar. 31 June 30 Sept. 30 Dec. 31Property taxes expense $10,000 $10,000 $10,000 $10,000Repairs expense 30,000 30,000 30,000 30,000Market decline of inventories 420,000

Ex. 13–12 Computation of Lundy Company’s cost of goods sold for each of four quarters of year ended Apr. 30, 2006:

Quarter ended Computation for quarter

Cost of goods sold

July 31, 2005 (1,000 x $7.50) + (3,500 x $8) $ 35,500Oct. 31, 2005 (1,500 x $8.00) + (5,500 x $8.50) 58,750Jan. 31, 2006 (500 x $8.50) + (6,000 x $9) + (2,000 x $0.50) 59,250Apr. 30, 2006 (2,000 x $8.50) + (3,500 x $8.50) 46,750

Total $200,250

Ex. 13–13 Computation of Marmon Corporation’s estimated effective combined income tax rate for year ended April 30, 2007:

Estimated pre-tax financial income $100,000Add: Forecasted premium expenses of officers’ life insurance 10,000Less: Forecasted dividend received deduction (20,000 )Estimated taxable income $ 90,000 Estimated income taxes expense ($90,000 x 0.40) $ 36,000 Estimated effective income tax rate ($36,000 $100,000) 36 %

Ex. 13–14 Journal entries for Basey Company:

2006July 31 Income Taxes Expense 110,000

Income Taxes Payable 110,000To provide for estimated federal and state income taxes for the first quarter of Fiscal Year 2007 ($200,000 x 0.55 = $110,000).

Oct. 31 Income Taxes Expense 124,000Income Taxes Payable 124,000

To provide for estimated federal and state income taxes for the second quarter of Fiscal Year 2007 [($450,000 x 0.52) – $110,000 = $124,000].

Ex. 13–15 Journal entries for Public Company:

2006Nov. 30 Cost of Goods Sold ($210,000 – $170,000) 40,000

Liability Arising from Depletion of Base Layer of Lifo Inventories 40,000

To record obligation to replenish temporarily depleted base layer of last-in, first-out inventories.

Dec. 18 Inventories ($360,000 – $40,000) 320,000Liability Arising from Depletion of Base Layer of

Lifo Inventories 40,000Trade Accounts Payable 360,000

To record purchase of merchandise and restoration of depleted base layer of last-in, first-out inventories.

Ex. 13–16 Journal entries for Intero Company:


2006Mar. 31 Income Taxes Expense (500,000 x 0.386) 193,000

Income Taxes Payable 193,000To provide for estimated income taxes for the first quarter of 2006.

June 30 Income Taxes Expense [($1,100,000 x 0.412) – $193,000] 260,200Income Taxes Payable 260,200

To provide for estimated income taxes for the second quarter of 2006.

Ex. 13–17 Journal entries for Cassidy Company:

2006Feb. 1 Inventories ($110,000 – $30,000) 80,000

Liability Arising from Depletion of Base Layer of Lifo Inventories 30,000

Trade Accounts Payable 110,000To record purchase of merchandise and restoration of depleted base layer of last-in, first-out inventories.

Apr. 30 Income Taxes Expense ($340,000 – $160,000) 180,000Income Taxes Payable 180,000

To provide for estimated income taxes for second quarter of fiscal year ending October 31, 2006.

Ex. 13–18 Reconciliation between statutory federal income tax rate and effective income tax rate for Farber Company for year ended Sept. 30, 2006:

Federal income tax rate 40.00%State income tax, net of federal income tax benefit ($14,100 $100,000) = 14.1%; 14.1% x 0.60= 8.46%) 8.46Nontaxable municipal bond interest ($4,000 $100,000) (4.00)Other 1 .60 *Effective income tax rate 46 .06 %

*Nondeductible expenses ($1,600 $ 100,000) 1 .60%

CASES

Case 13–1 Ellen Laughlin can ethically comply with Wilbur Jackson’s instructions to include the $500,000 shipment to Wilmont Company on June 1 in Electronics, Inc.’s sales for the quarter ended May 31, 2006. Both the realized and the earned criteria for recognizing revenue, in paragraph 83 of FASB Statement of Financial Accounting No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises,” appear to be met, in that revenue is realized through the invoicing of the shipment to Wilmont, and revenue is earned through the production of the goods to Wilmont’s order and making the goods available for Wilmont’s pickup. Title apparently passed to the goods, per Sections 2401(1) and 2501(1) (b) of the Uniform Commercial Code, because packaging and invoicing the goods to Wilmont identified the goods to the contract with Wilmont. Laughlin, as a CPA and not an attorney, should verify her interpretation of the Uniform Commercial Code with legal counsel for Electronics, Inc.


Case 13–2 There is merit to student Jeff’s assertion. Most efforts of the FASB to improve comparability of financial information among business enterprises has centered on limiting, rather than relaxing, the accounting policies available for enterprise management. The management approach to segment reporting sanctioned by the FASB, which requires segmentation of business enterprises’ activities based on the way the enterprises are managed, assures that there will be littleif anycomparability of operating segments among business enterprises. Further, mandating disclosure of only segment revenues and segment profit or loss, with other disclosures subject to management’s approach to defining operating segments, suggests that a segment-by-segment comparison of elements of financial position and operating results among similar segments will be impossible. (Note to Instructor: The six-member FASB majority that assented to FASB Statement No. 131 expressed views contrary to those of student Jeff in paragraphs 57 through 70 thereof.)

Case 13–3 (Adapted from FASB Discussion Memorandum, “. . . Interim Financial Accounting and Reporting” (Stamford, 1978), pp. 29–33):

a. Arguments in favor of the integral theory of interim financial reporting:

(1) It minimizes short-term variations among expenses that reverse or are offset in subsequent interim periods of the same year.

(2) It facilitates a focus on annual operating results.

(3) It avoids the problems of matching interim period expenses with revenue that are inherent in the discrete theory of interim financial reporting.

(4) It avoids wide fluctuations in period-to-period operating results, which are typical of the discrete theory of interim financial reporting.

b. Arguments in favor of the discrete theory of interim financial reporting:

(1) It avoids the smoothing-of-income aspect of the integral theory of interim financial reporting. Expenses such as advertising and maintenance are recognized when incurred, as in annual financial reporting.

(2) It avoids the integral theory’s possibility of “dumping” into the fourth interim period accruals and deferrals that were recognized in the first three interim periods but are not appropriate at fiscal year-end.

(3) It reduces the amount of estimation of interim periods expected to be benefited by expenditures and thus reduces the cost of providing interim financial information.

(4) It avoids using different accounting procedures for interim and for annual reporting periods.

(5) It endorses the view that financial statements and reports for any accounting period should reflect only the transactions and events of that period.

c. (The student’s answer should be evaluated on the quality of its support for the student’s position.)

Case 13–4 The critics have a point. The SEC’s attempt to distinguish disclosure from generally accepted accounting principles may be challenged by considering the following excerpt from the AICPA’s Statement on Auditing Standards No. 58, “Reports on Audited Financial Statements” (para. 55):

Information essential for a fair presentation in conformity with generally accepted accounting principles should be set forth in the financial statements (which include the related notes).

The foregoing implies that disclosure is an integral part of generally accepted accounting principles. Thus, the plethora of SEC pronouncements in Financial Reporting Releases and Staff Accounting Bulletins may be viewed as interpreting, if not establishing, generally accepted accounting principles.

Case 13–5 a. There are two weaknesses in the form and content of presentation of the first-quarter information by Nanson Company: (1) Some information in the income statement needs


further explanation, and (2) additional financial data should be presented and explained as appropriate in the circumstances.

The major weakness in the statement for the first quarter is that it is misleading because Nanson forecasted a net income for the year as a whole, not a net loss as would be assumed from the first-quarter income statement alone. Both sales and production were equal to the units forecasted for the first quarter, and if actual activity continues as planned for the rest of the year, Nanson will have a net income of $371,250 {$450,000 – [$175,000 x (1 – 0.55)]} for 2006. Thus, Nanson should indicate in the income statement for the first quarter that sales, production, and net income (loss) are in line with expectations, as related to the forecasted data and to the first quarters of prior years.

No other weakness in form and content is evident, except as discussed in b.

b. (1) The recognition of underapplied fixed factory overhead as an asset is the preferred method of accounting. The expected year-end result is that actual production will exactly equal forecasted production on which the standard was based; thus, no volume variance should exist at year-end.

(2) The manner in which the operating expenses were handled in the report is the preferred method. These costs are not inventoriable; they are not associated directly with the product; and they have been incurred at expected levels. Thus, operating expenses should be recognized immediately when incurred or be allocated among interim periods based on the estimate of time expired, benefit received, or activity associated with the interim periods.

(3) The warehouse explosion loss is an extraordinary item that should be disclosed in the interim income statement, net of income tax effect. The $175,000 loss should be reduced by the effective income tax reduction of $96,250 ($175,000 x 0.55 = $96,250). Thus, the loss should reduce net income by $78,750 ($175,000 – $96,250 = $78,750), and the nature of the loss should be explained in a note to the interim income statement.

(4) A negative amount for income taxes expense (an income tax benefit) should have been included in the income statement for the first quarter. The $35,000 operating loss should have been reduced by $19,250 ($35,000 x 0.55 = $19,250), the expected tax reduction to be realized from profitable operations during the remaining three quarters of 2006. The potential income tax benefits resulting from losses that arise in the early part of the year are recognized, subject to a valuation allowance if required by paragraph 17e of FASB Statement No. 109, “Accounting for Income Taxes.”

(5) Basic and diluted earnings per share of common stock data for each interim period presented are included in the income statement for the first quarter if a business enterprise meets the conditions requiring both earnings per share computations. Because Nanson has a simple capital structure, it reports only basic earnings per share. However, Nanson should have reported per-share amounts for the loss before extraordinary item, the extraordinary item, and the net loss.


20 Minutes, EasyWabash Company Pr. 13–1

Wabash CompanyComputations of Segment Profit or Loss for Operating Segments

For Year Ended November 30, 2006

Operating SegmentAlpha Beta Gamma Delta

Revenue:Net sales to outsiders $ 4 0 0 0 0 $ 2 0 0 0 0 $ 2 5 0 0 0 $ 5 0 0 0Intersegment transfers out 2 0 0 0 4 0 0 0 1 0 0 0 3 0 0 0

Total revenue $ 4 2 0 0 0 $ 2 4 0 0 0 $ 2 6 0 0 0 $ 8 0 0 0Expenses:

Intersegment transfers in $ 4 0 0 0 $ 3 0 0 0 $ 2 0 0 0 $ 1 0 0 0Other traceable expenses 9 0 0 0 6 0 0 0 5 0 0 0 1 0 0 0 0Nontraceable expenses (40%) 8 0 0 0 (30%) 6 0 0 0 (20%) 4 0 0 0 (10%) 2 0 0 0

Total expenses $ 2 1 0 0 0 $ 1 5 0 0 0 $ 1 1 0 0 0 $ 1 3 0 0 0Segment profit (loss) $ 2 1 0 0 0 $ 9 0 0 0 $ 1 5 0 0 0 $ ( 5 0 0 0 )

40 Minutes, MediumCregar Company Pr. 13–2

Cregar Company

Corrected Partial Comparative Income Statements

For Three Years Ended December 31, 2006

2006 2005 2004

Income from continuing operations before

income taxes $2 2 4 0 0 0 0 (1) $1 7 0 0 0 0 0 (2) $1 1 0 0 0 0 0 (3)

Income taxes expense (4) 8 9 6 0 0 0 6 8 0 0 0 0 4 4 0 0 0 0

Income from continuing operations $1 3 4 4 0 0 0 $1 0 2 0 0 0 0 $ 6 6 0 0 0 0

Discontinued operations:

Income (loss) from operations of

discontinued business segment, including

$900,000 gain on disposal in 2006 (less

applicable income taxes of $104,000 in

2006, ($200,000) in 2005, and $80,000

in 2004) 1 5 6 0 0 0 (5) ( 3 0 0 0 0 0 )(6) 1 2 0 0 0 0 (7)

1 5 6 0 0 0 (7)

Net income $1 5 0 0 0 0 0 $ 7 2 0 0 0 0 $ 7 8 0 0 0 0

Computations:

(1) $1,600,000 + $640,000 = $2,240,000

(2) $1,200,000 + $500,000 = $1,700,000

(3) $1,300,000 – $200,000 = $1,100,000

(4) Pre-tax income x 0.40

(5) ($900,000 – $640,000) x 0.60 = $156,000

(6) $(500,000) x 0.60 = $(300,000)

(7) $200,000 x 0.60 = $120,000


45 Minutes, MediumLang Corporation Pr. 13–3

a. Lang CorporationComputation of Effective Income Tax Rates

For Year Ended July 31, 2006

Year ended July 31, 2006First Second Third Fourth

quarter quarter quarter quarter

Forecasted or actual pre-tax financial income for year $ 8 0 0 0 0 0 $ 8 0 0 0 0 0 $ 8 0 0 0 0 0 $ 8 3 0 0 0 0

Forecasted or actual permanent differences between pre-tax financial income and taxable income for year:

Dividend received deduction ( 1 5 0 0 0 0 ) ( 1 8 0 0 0 0 ) ( 1 8 0 0 0 0 ) ( 1 7 5 0 0 0 )Lobbying expenses 2 0 0 0 0 2 0 0 0 0 2 0 0 0 0 2 0 0 0 0Officers’ life insurance premium

expense 1 5 0 0 0 1 5 0 0 0 1 5 0 0 0 1 6 0 0 0

Forecasted or actual taxable income for year $ 6 8 5 0 0 0 $ 6 5 5 0 0 0 $ 6 5 5 0 0 0 $ 6 9 1 0 0 0

Combined federal and state income taxes at 40% $ 2 7 4 0 0 0 $ 2 6 2 0 0 0 $ 2 6 2 0 0 0 $ 2 7 6 4 0 0

Effective combined federal and state income tax rates 3 4 . 3 % 3 2 . 8 % 3 2 . 8 % 3 3 . 3 %


Lang Corporation (concluded) Pr. 13–3

b. Lang Corporations

Journal Entries

20 05

Oct 31 Income Taxes Expense 6 1 7 4 0

Income Taxes Payable 6 1 7 4 0

To record income taxes for first quarter of Fiscal Year

2006 ($180,000 x 0.343 = $61,740).

20 06

Jan 31 Income Taxes Expense 7 2 7 4 0


To record income taxes for second quarter of Fiscal

Year 2006 as follows:

$410,000 x 0.328 $134,480

Less: Expense for first quarter 61,740

Expense for second quarter $ 72,740

Apr 30 Income Taxes Expense 6 3 9 6 0


To record income taxes for third quarter of Fiscal Year

2006 as follows:

$605,000 x 0.328 $198,440

Less: Expense for first two quarters 134,480

Expense for third quarter $ 63,960

July 31 Income Taxes Expense 7 7 9 6 0


To record income taxes payable for fourth quarter of

Fiscal Year 2006 as follows:

Total income taxes expense for 2006 $276,400*

Less: Expense for first three quarters 198,440

Expense for fourth quarter $ 77,960

* ($691,000 x 0.40) = $276,400 (or see a on page

399.)


50 Minutes, MediumBixier Company Pr. 13–4

Bixler Company

Income Statements

For Two Years Ended December 31, 2006

2006 2005

Net sales $7 0 8 0 0 0 0 $5 6 7 0 0 0 0Cost of goods sold 4 0 0 0 0 0 0 3 4 0 0 0 0 0

Gross margin on sales $3 0 8 0 0 0 0 $2 2 7 0 0 0 0Operating expenses 1 0 5 0 0 0 0 5 5 0 0 0 0

Operating income $2 0 3 0 0 0 0 $1 7 2 0 0 0 0Other gains (losses):

Interest $ 7 0 0 0 0 $ 4 0 0 0 0Gain on disposal of plant 1 3 0 0 0 0Loss from flood damage ( 4 2 0 0 0 0 )

Net other gains (losses) $ ( 2 2 0 0 0 0 ) $ 4 0 0 0 0Income from continuing operations before income taxes $1 8 1 0 0 0 0 $1 7 6 0 0 0 0Less: Income taxes expense (40%) 7 2 4 0 0 0 7 0 4 0 0 0

Income from continuing operations $1 0 8 6 0 0 0 $1 0 5 6 0 0 0Discontinued operations:

(Loss) from operations of discontinued office equipment division $( 4 2 0 0 0 0 )(1)Less: applicable income taxes 1 6 8 0 0 0

Loss net of income taxes $( 2 5 2 0 0 0 )Gain on disposal of office equipment division $ 1 1 0 0 0 0 (2)Less: applicable income taxes 4 4 0 0 0

Gain net of income taxes $ 6 6 0 0 0Net income $1 1 5 2 0 0 0 $ 8 0 4 0 0 0

Computations:

(1) $1,330,000 – $1,750,000 = $(420,000)

(2) $640,000 – ($1,450,000 – $920,000) = $110,000


45 Minutes, MediumDraco Company Pr. 13–5

a. Draco Company

Income Statement

For Year Ended December 31, 2006

Net sales $10 0 0 0 0 0 0

Cost, expenses, and losses

Cost of goods sold $8 0 0 0 0 0 0

Operating expenses 8 0 0 0 0 0

Loss from bankruptcy of major customer 1 5 0 0 0 0

Judgment paid 8 0 0 0 0

Interest expense 1 0 0 0 0 0 9 1 3 0 0 0 0

Income from continuing operations before income

taxes $ 8 7 0 0 0 0

Income taxes expense ($870,000 x 0.40) 3 4 8 0 0 0

Income from continuing operations $ 5 2 2 0 0 0


Loss from operations of discontinued

Southern Division, including $50,000

estimated loss on disposal (less applicable

income taxes) ( 1 0 2 0 0 0 )

Income before extraordinary item $ 4 2 0 0 0 0

Extraordinary item (loss from earthquake at Northern

Division), net of income tax credit of $64,000 ( 9 6 0 0 0 )

Net income $ 3 2 4 0 0 0

b. Draco Company

Journal Entry

December 31, 2006

Income Taxes Expense 3 4 8 0 0 0

Income Taxes Payable 2 1 6 0 0 0

Loss from Operations of Discontinued

Southern Division (income tax effect) 6 8 0 0 0

Extraordinary Item—Loss (income tax effect) 6 4 0 0 0

To record income taxes for 2006, including intraperiod

tax allocation.


60 Minutes, StrongPrincipia Corporation Pr. 13–6

a. Principia Corporation and Subsidiaries

Information about Segment Profit or Loss and Segment Assets and Liabilities


(amount in thousands)

Operating Segment

Principia Seattle Boston London Total

Revenues from external customers 5 0 0 4 0 0 3 0 0 2 0 0 1 4 0 0

Intersegment revenues 4 0 3 0 2 0 1 0 1 0 0

Segment profit 1 7 8 1 8 6 4 9

Interest revenue 2 0 2 0

Segment assets 6 7 3 2 2 3 0 0 2 1 0 0 1 9 0 0 1 3 0 3 2

b. Principia Corporation and Subsidiaries

Reconciliation of Operating Segment Totals to Consolidated Totals


(amount in thousands)

Segment

Revenue profit Assets

Segment totals 1 5 0 0 4 9 1 3 0 3 2

Elimination of intersegment items ( 1 0 0 ) ( 3 6 ) ( 4 5 3 6 )

Unallocated interest revenue 2 0 2 0

Consolidated amounts 1 4 2 0 3 3 8 4 9 6


60 Minutes, StrongLobeck Company et al. Pr. 13–7

a. Lobeck Company

Partial Income Statement

For Year Ended April 30, 2006

Income from continuing operations before income taxes $1 1 7 0 0 0 0

Income taxes expense 4 6 8 0 0 0

Income from continuing operations 7 0 2 0 0 0


Loss from operations of discontinued Texas

Division, including $50,000 loss on disposal

(less applicable income taxes) 1 0 2 0 0 0

Net income $ 6 0 0 0 0 0

Note to Instructor: Beginning with net income, the remaining amounts in the partial income statement

must be “backed into” after the discontinued operations amounts is computed.

b. Spratt Company

Journal Entries

20 06

Mar 31 Income Taxes Expense ($100,000 x 0.45) 4 5 0 0 0


June 30 Income Taxes Expense [($220,000 x 0.46) – $45,000] 5 6 2 0 0


Sept 30 Income Taxes Expense [($360,000 x 0.44) – $101,200] 5 7 2 0 0


Dec 31 Income Taxes Expense [($510,000 x 0.43) – $158,400] 6 0 9 0 0


c. Jackson Company

Journal Entries

20 06

Mar 31 Cost of Goods Sold ($210,000 – $120,000) 9 0 0 0 0

Liability Arising from Depletion of Base Layer

of Lifo Inventories 9 0 0 0 0

Apr 30 Inventories ($370,000 – $90,000) 2 8 0 0 0 0

Liability Arising from Depletion of Base Layer of Lifo

Inventories 9 0 0 0 0

Trade Accounts Payable 3 7 0 0 0 0


chapter 13, modern advanced accounting-review q & exr

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