Reference no: EM132880451
Problem - Income Statement and Segment Reporting - The following items are based on Reed Company's December 31, 2019, adjusted trial balance:
Cost of goods sold $121,120 Loss due to flood (pretax) $8,000
Interest expense 4,880 Sales (net) 200,000
Depreciation expense 7,000 Administrative expenses 16,000
Selling expenses 26,000 Interest revenue 1,000
Additional information:
1. Reed had 5,000 shares of common stock outstanding the entire year.
2. The income tax rate is 30% on all items.
3. Reed operates several divisions, two of which, Divisions 1 and 2, are reportable operating segments.
4. No intersegment sales are made by any division. Of the total sales (net), Division 1 made 49%; Division 2, 30%; and the remaining segments, 21%.
5. Cost of goods sold as a percentage of net sales in each division was: Division 1, 62%; Division 2, 60%; other segments, 58%.
6. Selling expenses consist of sales salaries, sales commissions, delivery costs, advertising, and miscellaneous expenses. These are traceable to the divisions as follows:
a. Sales salaries ($6,000): $3,000 to Division 1, $2,000 to Division 2, and $1,000 to the remaining segments.
b. Sales commissions ($4,000): 2% of net sales in all segments.
c. Delivery costs ($5,000): 60% to Division 1, 30% to Division 2, and 10% to the remaining segments.
d. Advertising ($10,500): Of the total, $1,200 was spent on general advertising. Of the remainder, $4,600 was spent in Division 1, $3,200 in Division 2, and $1,500 in the other segments.
e. The miscellaneous selling expenses of $500 are considered common costs and are not allocated to any segments.
7. Administrative expenses consist of bad debts, administrative salaries, property taxes, and miscellaneous expenses. These are allocable to the segments as follows:
a. Bad debts ($2,000): 1% of net sales in all segments.
b. Administrative salaries ($10,000): Of the total, $2,100 are considered general corporate salaries. Of the remainder, $3,800 is allocated to Division 1, $2,500 to Division 2, and $1,600 to the other segments.
c. Property taxes ($3,000): Of the total, $1,600 are general corporate expenses. Of the remainder, 40% is allocable to Division 1, 35% to Division 2, and 25% to the remaining segments.
d. The miscellaneous administrative expenses of $1,000 are considered common costs and are not allocated to any segments.
8. Depreciation expense is listed as a separate item on the income statement. Of the total, $1,400 is a general corporate expense. Of the remainder, 40% is allocable to Division 1, 30% to Division 2, and 30% to the remaining segments.
9. Interest revenue is from corporate investments in marketable securities. Interest expense is related to corporate bonds used to finance general operating activities.
10. A flood causing the material pretax loss occurred in Division 1.
11. Of the $300,000 total assets on December 31, 2019, 45% are assets of Division 1, 29% are assets of Division 2, 18% are assets of the remaining segments, and 8% are assets related to corporate headquarters.
12. Capital expenditures amounted to $25,000 in Division 1 and $6,000 in Division 2 during 2019 and are included in the total assets on December 31, 2019.
Required -
1. Prepare a 2019 multiple-step income statement for Reed.
2. Prepare a separate schedule that discloses the revenues, profit, and assets of Divisions 1 and 2, and the remaining operating segments.
3. Prepare appropriate segment notes related to depreciation, profit, and capital expenditures.
4. Compute the profit margin before income taxes and pretax return on identifiable assets for Divisions 1 and 2, and for the other divisions. What do these ratios reveal?