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Chapter 24: 3E_b (page 1447)

Carlton Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment

Total Revenue

Operating Profit (Loss)

Identifiable Assets

W

\( 60,000

15,000

\)167,000

X

10,000

3,000

83,000

Y

23,000

(2,000)

21,000

Z

9,000

1,000

19,000

\(102,000

\)17,000

$290,000

Instructions

Determine which of the operating segments are reportable based on the:

b) Operating profit (loss) test.

Short Answer

Expert verified

Segments W and X are reportable.

Step by step solution

01

Meaning of operating profit  

Operating profit is the revenue generated by a company's basic activities, excluding any financing or tax-related concerns. The notion is utilized to look at a company's earnings potential while disregarding all other variables.

02

Determining the operating segment that is reportable

Calculation of operating profit and (loss) test

Opeartingprofitandlosstest=Totalprofitandlossbyoperatingsegment×Opeartingrate=$15,000+$3,000+$1,000-$2,000×10%=$17,000×10%=$1,700

Segments W for $15,000 and X for $3,000, meet the test.

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Most popular questions from this chapter

Carlton Company is involved in four separate industries. The following information is available for each of the four industries.

Operating Segment
Total Revenue
Operating Profit (Loss)
Identifiable Assets
W
 \( 60,000
15,000
\)167,000
X
 10,000
 3,000
 83,000
Y
 23,000
 (2,000)
 21,000
Z
 9,000
 1,000
 19,000

\(102,000
\)17,000
$290,000

Instructions

Determine which of the operating segments are reportable based on the:

c) Identifiable assets test.

(Effect of Transactions on Financial Statements and Ratios) The transactions listed below relate to Wainwright Inc. You are to assume that on the date on which each of the transactions occurred, the corporation’s accounts showed only common stock (\(100 par) outstanding, a current ratio of 2.7:1, and a substantial net income for the year to date (before giving effect to the transaction concerned). On that date, the book value per share of stock was \)151.53.

Each numbered transaction on the next page is to be considered completely independent of the others, and its related answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions occurred during 2018 and that the amount involved in each case is sufficiently material to distort reported net income if improperly included in the determination of net income. Assume further that each transaction was recorded in accordance with generally accepted accounting principles and, where applicable, in conformity with the all-inclusive concept of the income statement.

For each of the numbered transactions you are to decide whether it:

  1. Increased the corporation’s 2018 net income.
  2. Decreased the corporation’s 2018 net income.
  3. Increased the corporation’s total retained earnings directly (i.e., not via net income).
  4. Decreased the corporation’s total retained earnings directly.
  5. Increased the corporation’s current ratio.
  6. Decreased the corporation’s current ratio.
  7. Increased each stockholder’s proportionate share of total stockholders’ equity.
  8. Decreased each stockholder’s proportionate share of total stockholders’ equity.
  9. Increased each stockholder’s equity per share of stock (book value).
  10. Decreased each stockholder’s equity per share of stock (book value).
  11. Had none of the foregoing effects.

Instructions

List the numbers 1 through 9. Select as many letters as you deem appropriate to reflect the effect(s) of each transaction as of the date of the transaction by printing beside the transaction number the letter(s) that identifies that transaction’s effect(s).

Transactions

  1. In January, the board directed the write-off of certain patent rights that had suddenly and unexpectedly become worthless.

Your firm has been engaged to examine the financial statements of Almaden Corporation for the year 2017. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2012. The client provides you with the following information.

ALMADEN CORPORATION

BALANCE SHEET

DECEMBER 31, 2017

Asset

Liabilities

Current assets

\(1,881,100

Current liabilities

\) 962,400

Other assets

5,171,400

Long-term liabilities

1,439,500


Capital

4,650,600

\(7,052,500

\)7,052,500

An analysis of current assets discloses the following.

Cash (restricted in the amount of \(300,000 for plant expansion)

\)571,000

Investments in Land

185,000

Accounts receivable less allowance of \(30,000

480,000

Inventories (LIFO flow assumption)

645,100

\)1,881,100

Other assets include:

Prepaid expenses

\( 62,400

Plant and equipment less accumulated depreciation of \)1,430,000

4,130,000

The cash surrender value of life insurance policy

84,000

Unamortized bond discount

34,500

Notes receivable (short-term)

162,300

Goodwill

252,000

Land

446,200

\(5,171,400

Current liabilities include:

Accounts payable

\) 510,000

Notes payable (due 2020

157,400

Estimated income taxes payable

145,000

Premium on common stock

150,000

\( 962,400

Long-term liabilities include

Unearned revenue

\) 489,500

Dividends payable (cash

200,000

8% bonds payable (due May 1, 2022)

750,000

\(1,439,500

Capital includes:

Retained earnings

\)2,810,600

Common stock, par value \(10; authorized 200,000 shares, 184,000 shares issued

1,840,000

\)4,650,600

The supplementary information below is also provided.

  1. On May 1, 2017, the corporation issued at 95.4, \(750,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
  2. The bookkeeper made the following mistakes.
    1. In 2015, the ending inventory was overstated by \)183,000. The ending inventories for 2016 and 2017 were correctly computed.
    2. In 2017, accrued wages in the amount of \(225,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
    3. In 2017, a gain of \)175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
  3. A major competitor has introduced a line of products that will compete directly with Almaden’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Almaden’s line. The competitor announced its new line on January 14, 2018. Almaden indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but permit recovery of only a portion of fixed costs.
  4. You learned on January 28, 2018, prior to completion of the audit, of heavy damage because of a recent fire to one of Almaden’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.

Instructions

Analyze the above information to prepare a corrected balance sheet for Almaden in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings.

(Horizontal and Vertical Analysis) Presented below is the comparative balance sheet for Gilmour Company.

GILMOUR COMPANY

COMPARATIVE BALANCE SHEET

AS OF DECEMBER 31, 2018 AND 2017

December 31

2018

2017

Assets

Cash

\( 180,000

\) 275,000

Accounts receivable (net)

220,000

155,000

Short-term investments

270,000

150,000

Inventories

1,060,000

980,000

Prepaid expenses

25,000

25,000

Plant & equipment

2,585,000

1,950,000

Accumulated depreciation

(1,000,000)

(750,000)

\(3,340,000

(2,785,000)

Liabilities and Stockholders’ Equity

Accounts payable

\) 50,000

\( 75,000

Accrued expenses

170,000

200,000

Bonds payable

450,000

190,000

Common stock

2,100,000

1,770,000

Retained earnings

570,000

550,000

\)3,340,000

(2,785,000)

Instructions

(Round to two decimal places.)

  1. Of what value is the additional information provided in part (b)?

Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich—but, rats!, even recourse to the Freedom of Information Act didn’t help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole—but no one was very eager to salute. Even after some of the more objectionable features—compulsory corrections and detailed explanations of why the estimates went awry—were peeled off the original proposal.

Seemingly, despite the Commission’s smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a “Safe Harbor” rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

  1. What are the arguments for preparing profit forecasts?
See all solutions

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