Chapter 24 Solutions

EXERCISE 24-2

1. (a) 4. (b) 7. (c) 10. (c)

2. (c) 5. (c) 8. (b) 11. (a)
3. (b) 6. (c) 9. (a) 12. (b)
EXERCISE 24.3

(a) Revenue test: .10 X $102,000 = $10,200.

Segments W ($60,000) and Y ($23,000) both meet this test.

(b) Operating profit test: .10 X ($15,000 + $3,000 + $1,000) = $1,900.

Segments W ($15,000), X ($3,000), and Y ($2,000 absolute
amount) all meet this test.

(c) Identifiable assets test: .10 X $290,000 = $29,000.

Segments W ($167,000) and X ($83,000) both meet this test.

CA 24.4
1. The financial statements should be adjusted for the expected loss pertaining to the
remaining
receivable of $240,000. Such adjustment should reduce accounts receivable to their
realizable value as of December 31, 2020.
2. Report the fire loss in a footnote to the balance sheet and refer to it in connection
with the income statement, since earnings power is presumably affected.
3. Strikes are considered general knowledge and therefore disclosure is not required.
Many auditors, however, would encourage disclosure in all cases.
4. If this event is of the second type, which provides evidence with respect to
conditions that did not exist at December 31, 2020, then appropriate disclosures
should indicate that:
(a) Recovery of costs invested in plant and inventory is in doubt.
(b) The company may incur additional costs to modify the existing facility.
(c) Due to this situation, future economic events cannot be determined. (If we
could determine them, pro-forma information might be appropriate.)
If it is the type of subsequent event for which the condition existed at December 31,
2020, then the financial statements must be adjusted. The provisions of GAAP
accounting related to contingencies would govern if amounts could not be
 estimated. It should be emphasized in class that no right answer exists for this
problem.
CA 24.4, continued

Judgment must play a major role in determining the adjustment or disclosure

necessary for this transaction.
5. Adjust the inventory figure as of December 31, 2020, as required by a market price
of $2.00
instead of $1.40, applying the lower-of-cost-or-market principle. The actual quotation
was a transitory error and no purchases had been made at this quotation.
6. Report the action of the new stock issue in a footnote to the balance sheet.

CA 24.5
To: Anthony Reese, Accountant
From: Student
Date: Current date
Subject: Determination of reportable segments for Winsor Corporation International.
I have analyzed the segment information that you gave me and determined that the
funeral, the cemetery, and the real estate segments must be reported separately. The
remaining three—the limousine, floral, and dried whey segments—can be combined
under the category of other.
To make this determination, I applied three criteria put forth by the FASB to the
information provided for 2021. First, a segment must be reported separately if its
revenue is greater than or equal to
10 percent of the enterprise’s combined revenue. This is the case with both the funeral
and the cemetery segments as revenue for both is greater than $40,600 (10 percent of
combined revenue).

Second, a segment is considered significant enough to be reported separately if its

absolute operating profit or operating loss is 10% or more of the greater, in absolute
amount of: (a) the combined operating profit of all segments without an operating loss or
(b) the combined operating loss of all segments that incurred a loss. Combined
operating profit for all profitable segments totals $96,000. Both the funeral and the
cemetery segments have operating profits exceeding 10% of total profits whereas the
real estate segment’s operating loss in absolute amount is greater than 10 percent of
total profits. Thus, all three must be separately reported.
Third, a segment must be reported separately if its identifiable assets are greater than
or equal to
10 percent of the combined identifiable assets for all segments. Again, the funeral, the
cemetery, and the real estate segments meet this test. Note that the limousine, floral,
and dried whey segments meet none of the above criteria, so they are not reported
separately.

CA 24.5, Continued

When reporting segment information, you must include the following items: revenues,
operating profit (loss), identifiable assets, depreciation expense, and amount of capital
expenditures. Furthermore, all segment information must be prepared on the same
accounting basis as the consolidated entity’s.
I hope that this information helps you in determining future reportable segments. If you
have any other questions, please contact me.

CA 24.8

(a) 1. The company should report its quarterly results as if each interim period is an
integral part of the annual period, although the discrete approach is used for
some items.
2. The company’s revenue and expenses would be reported as follows on its
quarterly report prepared for the first quarter of the 2020–2021 fiscal year:
Sales revenue.........................................................................$60,000,000
Cost of goods sold....................................................................36,000,000
Variable selling expenses........................................................................... 1,000,000
Fixed selling expenses
Advertising ($2,000,000 ÷ 4).............................................................. 500,000
Other ($3,000,000 – $2,000,000)....................................................... 1,000,000

Sales revenue and cost of goods sold receive the same treatment as if this
were an annual report. Costs and expenses other than product costs should be
charged to expense in interim periods as incurred or allocated among interim
periods. Consequently, the variable selling expense and the portion of fixed
selling expenses not related to the television advertising should be reported
in full. One-fourth of the television advertising is reported as an expense in
the first quarter, assuming TV advertising is constant throughout the year.
These costs can be deferred within the fiscal period if the benefits of the
expenditure clearly extend beyond the interim period in which the
expenditure is made.

(b) The financial information to be disclosed to its stockholders in its quarterly reports
as a minimum include:
1. Sales revenue or gross revenues, provision for income taxes, extraordinary
items and net income.
2. Basic and diluted earnings per share.
3. Seasonal revenue, costs or expenses.
4. Significant changes in estimates or provisions for income taxes.
 5. Disposal of a component of a business and unusual, or infrequently occurring
items.
6. Contingent items.
7. Changes in accounting principles or estimates.
8. Significant changes in financial position.

CA 24.10
(a) Arguments for requiring published forecasts:
1. Investment decisions are based on future expectations; therefore, information
about the
future would facilitate better decisions.
2. Forecasts are already circulated informally, but are uncontrolled, frequently
misleading, and may not be available equally to all investors. This confused
situation should be brought under control.
3. Circumstances now change so rapidly that historical information is no longer
adequate as a base of prediction.
(b) The purpose of a safe harbor rule is to provide protection to an enterprise that
presents an erroneous projection as long as the projections were prepared on a
reasonable basis and were disclosed in good faith. An enterprise’s concern with
the safe harbor rule is that a jury’s definition of reasonable might be at some
variance from a company’s or, for that matter, the SEC’s.
(c) An enterprise’s concerns about preparing a forecast are as follows:
1. No one can foretell the future. Therefore, forecasts, while conveying an
impression of precision about the future, will inevitably be wrong.
2. Organizations will strive only to meet their published forecasts, not to
produce results that are in the stockholders’ best interest.
3. When forecasts are not proved to be accurate, there will be recriminations and
probably legal actions. Even with a safe harbor rule, enterprises are
concerned because the definition of reasonable is subjective.
4. Disclosure of forecasts will be detrimental to enterprises because it will fully
inform not only investors, but also competitors (foreign and domestic).

CA 24.11
(a) The controller notes that the financial vice president is misrepresenting the financial
condition of the company by suggesting that the company has become more efficient
when, in fact, the
improved ratio is gained through manipulation of estimates. The controller, however,
hesitates because estimating does not follow precise, clear-cut rules. The dilemma exists
because Lilly is asked to weigh the benefits that may accrue to the company if its profit
margin on sales appears much improved against the accountant’s normal requirement to
present financial information fairly (that is, in a manner that is consistent with previous
reporting).
(b) No, the controller should oppose the release of the publicity. The company has not
improved its financial condition, and the claim of increased efficiency is not supported by the
financial information.

(c) The favorable media release enhances the current stockholders’ position, as well as
boosting the image of management. Such publicity may well contribute to an increased stock
price. Future investors and stockholders are harmed because the media release depicts a
misleading perspective on the financial condition of the company.

(d) The controller is responsible for both the accuracy and the clarity of financial reporting. If the
media release obscures how an accounting decision has influenced the apparent
improvement of the company’s financial condition, the controller cannot let this matter
slide. Lilly must protest and not let her name be connected to the misinformation.