During the first quarter of 1993, Tech Co. had income before taxes of $200,000, and its effective income tax rate was 15%. Tech's 1992 effective annual income tax rate was 30%, but Tech expects its 1993 effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of income tax expense should Tech report?
Answer(s): C
Choice "c" is correct. Interim period tax expense is the estimated annual effective tax rate (25% in this case) applied to the year-to-date income before taxes minus the tax expense recognized in previous interim periods. Since this question involves the first quarter, there are no previous interim periods. 25% × $200,000 = $50,000. FIN 18, para. 16Choice "a" is incorrect. Income tax expense is reported in interim income statements. Choice "b" is incorrect. The 1993 annual estimated tax rate, not the first quarter effective tax rate, is used to calculate income tax expense for interim statements. Choice "d" is incorrect. The 1993 annual estimated tax rate, not the 1992 annual effective tax rate, is used to calculate income tax expense for interim statements.
Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements?
Answer(s): D
Choice "d" is correct. When the loss is probable and estimable, the expected loss must be recorded in full. This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the year-end at the lower of cost or market, recognizing the loss at that time. Choice "a" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters.Choice "b" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters.Choice "c" is incorrect. Since the loss is not probable at the end of the second quarter, no amount should be recognized at that time.
In general, an enterprise preparing interim financial statements should:
Choice "d" is correct. Generally accepted accounting principles that were used in the most recent annual report of an enterprise should be applied to interim financial statements of the current year, unless a change in accounting principle is adopted in the current year.Choices "a", "b", and "c" are incorrect, per above.
During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its effective income tax rate was 15%. Worth's effective annual income tax rate for the previous year was 30%. Worth expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first quarter interim income statement, what amount of income tax expense should Worth report?
Answer(s): B
Choice "b" is correct. When preparing interim financial statements, income tax expense is estimated each quarter using the effective tax rate expected to apply to the entire year. Choice "a" is incorrect. Worth should use the effective annual tax rate, not the effective tax rate for the quarter only.Choice "c" is incorrect. Worth should use the effective annual tax rate expected to apply to the current year, not the prior year's effective tax rate. Choice "d" is incorrect. Worth should use the effective annual tax rate, not the statutory tax rate.Segment Reporting
Terra Co.'s total revenues from its three operating segments were as follows:Which operating segment(s) is (are) deemed to be reportable segments?
Choice "d" is correct. A reportable operating segment is one having 10% of all revenue, including revenue from unaffiliated sales and from intersegment sales:Lion's revenue percentage is 66.7% [$100,000/150,000].Monk's revenue percentage is 17.3% [$26,000/150,000].Nevi's revenue percentage is 16% [$24,000/150,000].Thus, all three segments meet the 10% of total revenues test and are reportable as operating segments. SFAS 14 para. 10 and 15 as amended by SFAS 131 Choice "a" is incorrect. All segments with revenue percentages exceeding 10% of total revenues are reportable operating segments.Choice "b" is incorrect. Lion is not the only segment with revenue percentages exceeding 10% of total revenues.Choice "c" is incorrect. Nevi has a revenue percentage exceeding 10% of total revenues.
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