Chapter 5, Problem 23P

1.

To determine

Provide a multi-step income statement for the year 2016.

Explanation of Solution

Multi step income statement: A multiple step income statement refers to the income statement that shows the operating and non-operating activities of the business under separate head. In different steps of the multi-step income statement, principal operating activities are reported that starts from the record of sales revenue with all contra sales revenue account like sales returns, allowances and sales discounts.

Provide a multi-step income statement for the year 2016.

Company R
Multi-Step Income Statement
For the Year Ended December 31, 2016
Particulars	Amount	Amount
	($)	($)
Sales revenue		$200,000
Less: Cost of goods sold		($121,120)
Gross profit		$78,880
Less: Operating expenses
Selling expenses	($26,000)
Administrative expenses	($16,000)
Depreciation expenses	($7,000)
Operating expenses		($49,000)
Operating income		$29,880
Other revenues and expenses:
Interest revenue	$1,000
Interest expense	($4,880)
Loss due to flood	($8,000)	($11,880)
Income before taxes		$18,000
Less: Income taxes @30%		($5,400)
Net income		$12,600
Components of income	Earnings per common share
Net income		$2.52

Table (1)

2.

To determine

Provide a schedule that discloses the revenues, profits, and assets of divisions 1 and 2 and the remaining operating segments.

Explanation of Solution

Provide a schedule that discloses the revenues, profits, and assets of divisions 1 and 2 and the remaining operating segments.

Company R
Industry Segment Financial Results
For the Year Ended December 31, 2016
Particulars	Reportable Operating Segments		All Other Segments	Totals
	1	2
Total revenues (Sales)	98,000	60,000	42,000	200,000
Segment profit (Pretax)	17,100	10,830	9,750	37,680
General corporate expenses				-7,800
Interest revenue				1,000
Interest expense				-4,880
Loss due to flood				-8,000
Income before taxes				18,000
Identifiable asset	135,000	87,000	54,000	276,000
General corporate assets				24,000

Table (2)

Working note (1):

Prepare a working paper for segment reporting:

Table (3)

3.

To determine

Provide a suitable segment notes related to depreciation, profit, and capital expenditures.

Explanation of Solution

In the calculation of segment profit none on the following item has been added or subtracted. Formula for segment profit is as follows:

$\text{Segment profit}=\frac{\text{Total profits}}{\text{Total operating expenses}}$

Depreciation expenses for Division 1 and 2 are $2,240 and $1,680 respectively.

In the year of 2016, capital expenditure amount of $25,000 placed in Division 1 and $6,000 placed in Division 2.

4.

To determine

Compute the profit margin before income taxes and pretax return on identifiable assets for Divisions 1 and 2 and for other divisions and evaluate the ratios.

Explanation of Solution

Compute the profit margin before income taxes for Division 1:

$\begin{array}{c}\begin{array}{l}\text{Profit margin before income}\\ \text{taxes for Division 1}\end{array}\}\text{=}\left(\frac{\text{Segment pretax profit}}{\text{Segment revenues}}\times 100\right)\\ =\left(\frac{\$17,100}{\$98,000}\times 100\right)\\ =17.5\%\end{array}$

Calculate profit margin before income taxes for Division 2:

$\begin{array}{c}\begin{array}{l}\text{Profit margin before income}\\ \text{taxes for Division 2}\end{array}\}\text{=}\left(\frac{\text{Segment pretax profit}}{\text{Segment revenues}}\times 100\right)\\ =\left(\frac{\$10,830}{\$60,000}\times 100\right)\\ =18.05\%\end{array}$

Calculate profit margin before income taxes for other division:

$\begin{array}{c}\begin{array}{l}\text{Profit margin before income}\\ \text{taxes for Other Division }\end{array}\}\text{=}\left(\frac{\text{Segment pretax profit}}{\text{Segment revenues}}\times 100\right)\\ =\left(\frac{\$9,750}{\$42,000}\times 100\right)\\ =23.21\%\end{array}$

Hence, the profit margin before income taxes for Division 1, 2 and other division is $17.5\%,18.05\%\text{ and }23.21\%$.

Calculate pretax return on identifiable assets for Division 1:

$\begin{array}{c}\begin{array}{l}\text{Pretax return on identifiable}\\ \text{assets for for Division 1}\end{array}\}\text{=}\left(\frac{\text{Segment pretax profit}}{\text{Segment assets}}\times 100\right)\\ =\left(\frac{\$17,100}{\$135,000}\times 100\right)\\ =12.7\%\end{array}$

Calculate pretax return on identifiable assets for Division 2:

$\begin{array}{c}\begin{array}{l}\text{Pretax return on identifiable}\\ \text{assets for for Division 2}\end{array}\}\text{=}\left(\frac{\text{Segment pretax profit}}{\text{Segment assets}}\times 100\right)\\ =\left(\frac{\$10,830}{\$87,000}\times 100\right)\\ =12.4\%\end{array}$

Calculate pretax return on identifiable assets for other division:

$\begin{array}{c}\begin{array}{l}\text{Pretax return on identifiable}\\ \text{assets for for Other Division}\end{array}\}\text{=}\left(\frac{\text{Segment pretax profit}}{\text{Segment assets}}\times 100\right)\\ =\left(\frac{\$9,750}{\$54,000}\times 100\right)\\ =18.1\%\end{array}$

Hence, the pretax return on identifiable assets Division 1, 2 and other division is $12.7\%,12.4\%\text{ and }18.1\%$.

These ratios expose that the profit margin before income taxes for other division has higher margin of 23.21%.

This ratio expose that the other operating divisions have a higher pretax profit margin and pretax return on identifiable assets than the two reportable divisions. This reveals that the economic resources are used lesser in the reportable divisions.