Chapter 8, Problem 37P

To determine

Determine the reportable segments by performing each applicable test and describe the procedure utilized to ensure that a sufficient number of segments are being separately disclosed.

Answer to Problem 37P

Computers, Maps, Travel and Finance are the reportable segment.

Explanation of Solution

Three testing procedures are performed to determine company E’s reportable operating segments.

1. Revenue test

2. Profit or loss test

3. Asset test

1. Revenue Test

Calculate total revenue of segments

	Books	Computers	Maps	Travel	Finance
Sales to outside parties	$             121	$             696	$            416	$           314	$  –0–
Intersegment transfers	$               24	$             240	$              39	$           118	–0–
Interest income- external	$               60	–0–	–0–	–0–	$            37
Interest income- Intersegment loans	–0–	–0–	–0–	–0–	$          147
Total revenue of segment	$             205	$             936	$            455	$           432	$          184

Table: (1)

Perform revenue test:

	Revenue	Percentage
Books	$             205	9.26%
Computers	$             936	42.31%
Maps	$             455	20.56%
Travel	$             432	19.52%
Finance	$             184	8.31%
Total	$          2,212	100%

Table: (2)

Segments with percentage more than 10% are reportable. These are computers, maps and travel.

2. Profit or loss test

Calculation of expenses of segments

	Books	Computers	Maps	Travel	Finance
Operating expenses	$             115	$             818	$            304	$           190	$            33
Expenses- Intersegment sales	$               70	$               51	$              31	$             46	–0–
Interest expense- external	–0–	–0–	–0– –	–0–	$          107
Interest expense-Intersegment loans	$               21	$               71	$              38	$             17	–0–
Income tax expense (savings)	$               12	$              (41)	$              27	$             31	$             (8)
Total expense of segments	$             218	$             899	$            400	$           284	$          132

Table: (3)

Perform profit and loss test by calculating profit or loss

	Revenues	Expense	Profit	Loss	Percentage
Books	$             205	$             218		$            (13)	(4.45%)
Computers	$             936	$             899	$              37		12.67%
Maps	$             455	$             400	$              55		18.83%
Travel	$             432	$             284	$            148		50.68%
Finance	$             184	$             132	$              52		17.80%
Total	$          2,212	$          1,933	$            292	$            (13)	100%

Table: (4)

Segments of 10% or more of profits are reportable. These are computers, maps, travel and finance.

3. Asset Test

Perform asset test

	Assets	Percentage
Books	$             206	6.06%
Computers	$          1,378	40.55%
Maps	$             248	7.29%
Travel	$             326	9.59%
Finance	$          1,240	36.49%
Total	$          3,398	100%

Table: (5)

Segments more than 10% of assets are reportable. These are computers and finance.

To ensure that a sufficient number of segments are being separately disclosed, 75% of consolidated revenues of four segments must be contributed from these four segments.

Calculate total consolidated revenues

$\begin{array}{c}\text{Total}\text{consolidated}\text{revenues}=\text{Company}\text{total}+\text{Finance}\text{income}+\text{Books}\text{income}\\ =\$1,547+\$37+\$24\\ =\$1,644\end{array}$

Thus, consolidated revenues are $1,644

Calculate minimum threshold

$\begin{array}{c}\text{Minimum}\text{threshold}=\$1,644\times 75\%\\ =\$1,233\end{array}$

Thus, minimum threshold is $1,233

Calculate consolidated revenues

$\begin{array}{c}\text{Consolidated}\text{revenues of 4 segments}\text{=}\text{Computers}+\text{Maps}+\text{Travel}+\text{Finance}\\ =\$696+\$416+\$314+\$37\\ =\$1,463\end{array}$

The consolidated revenues of four segments are more than the 75% of consolidated revenues. Hence, all four segments are reportable.