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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Corrections to service department charges for a service company

 Wild Sun Airliners Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared:

Wild Sun Airlines Inc.

Divisional Income Statements

For the Year Ended December 31. 20Y9

  Passenger Division Cargo Division
Revenues   $3,025,000   $3,025,000
Operating expenses   2,450,000   2,736,000
Income from operations before service department charges   $575,000   $289,000
Less service department charges:        
Training $125,000   $125,000  
Flight scheduling 108,000   108,000  
Reservations 151,200 384,200 151,200 384,200
Income from operations   $190,800   $(95,200)

 The service department charge rate for the service department costs was based on revenues. Because the revenues of the two divisions were the same, the service department charges to each division were also the same.

 The following additional information is available:

  Passenger Division Cargo Division Total
Number of personnel trained 350 150 500
Number of flights 800 1,200 2,000
Number of reservations requested 20,000 0 20,000

 a.    Does the income from operations for the two divisions accurately measure performance? Explain.

 b.    Correct the divisional income statements, using the activity bases provided in revising the service department charges.

(a)

To determine

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Service department charges: These are the indirect expenses incurred by profit center. These are charged for the services received by the department or division, based on the activity base of the service department.

To compare: The performance of P Division and C Division of Incorporation WSA, and explain if the income from operations as performance measure is accurate

Explanation
The income from operations as provided by the divisional income statements is not correct because the number of reservations r...

(b)

To determine

To prepare: The income statements for C Division and P Division

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