CHAPTER 24
Full Disclosure in Financial Reporting
OPTIONAL ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
BE24-3
BE24-5
BE24-6
BE24-7
Post-balance-sheet events.
Segment reporting.
Segment reporting.
Segment reporting.
E24-1
E24-3
Post-balance-sheet events.
Segment reporting.
CA24-4
CA24-5
Post-balance-sheet events.
Segment reporting (a. only; determine reportable segments based on 2011 data).
ACC 356 CH 24 Optional Homework, Page |1
BRIEF EXERCISE 24-3
Net income will decrease by $10,000 ($160,000 – $170,000) as a result of the adjustment of the liability. The
settlement of the liability is the type of subsequent event which provides additional evidence about conditions that
existed at the balance sheet date. The flood loss ($80,000) is an event that provides evidence about conditions that
did not exist at the balance sheet date but are subsequent to that date and does not require adjustment of the
financial statements.
BRIEF EXERCISE 24-5
Total revenue = $600 + $650 + $250 + $275 + $225 + $200 + $700 = $2,900.
Materiality test = $2,900 X 10% = $290.
Penley, Konami, and Molina meet this test, since their revenues equal or exceed $290.
BRIEF EXERCISE 24-6
Total profits of profitable segments = $90 + $25 + $50 + $34 + $150 = $349.
Materiality test = $349 X 10% = $34.90.
Penley, Konami, Red Moon, and Molina meet this test, since their absolute profit or loss equals or exceeds $34.90.
BRIEF EXERCISE 24-7
Total assets = $500 + $550 + $250 + $400 + $200 + $150 + $475 = $2,525.
Materiality test = $2,525 X 10% = $252.50.
Penley, Konami, Red Moon, and Molina meet this test, since their identifiable assets equal or exceed $252.50.
EXERCISE 24-1
(a)
The issuance of common stock is a subsequent event which provides evidence about conditions that did not
exist at the balance sheet date but arose subsequent to that date. Therefore, no adjustment to the financial
statements is recorded. However, this event should be disclosed either in a note, a supplemental schedule, or
even proforma financial data.
(b)
The changed estimate of taxes payable is a subsequent event which provides additional evidence about
conditions that existed at the balance sheet date. The income tax liability existed at December 31, 2012, but the
amount was not certain. The correct amount ($1,320,000) would have been recorded at December 31 if it had
been available. Therefore, Keystone should increase income tax expense in the 2012 income statement by
$220,000 ($1,320,000 – $1,100,000). In the balance sheet, income taxes payable should be increased and
retained earnings decreased by $220,000.
EXERCISE 24-3
Test
(a) Revenue
(b) Operating Profit/Loss
(c) Identifiable Assets
*
Materiality Test Value
10% x $102,000 = $10,200
10% x $17,500* = $1,750
10% x $290,000 = $29,000
Segments Meeting Test ( materiality test value)
W $60,000; Y $23,000
W $15,000; Y($2,000) (using absolute values)
W $167,000; X $83,000
combined profit for segments reporting profit = $15,000 + $1,500 + $1,000 = $17,500
(this is greater than combined losses of segment reporting a loss of $2,000)
Reportable segments based on materiality tests (since at least one test met): W, X, and Y
ACC 356 CH 24 Optional Homework, Page |2
Concepts for Analysis 24-4
1.
The financial statements should be adjusted for the expected loss pertaining to the remaining
receivable of $240,000, which will reduce accounts receivable to its realizable value of $60,000.
2.
Report the fire loss in a note to the financial statements.
3.
Strikes are considered general knowledge and therefore disclosure is not required. Many auditors, however,
would encourage disclosure in all cases.
4.
If this event is of the second type which provides evidence with respect to conditions that did not exist at
December 31, 2012, then appropriate disclosures should indicate that
a) recovery of costs invested in plant and inventory is in doubt,
b) the company may incur additional costs to modify the existing facility, and
c) due to this situation, future economic events cannot be determined (if they could be determined, proforma information might be appropriate.)
If this is the type of subsequent event for which the condition existed at December 31, 2010, then the financial
statements must be adjusted if amounts can be reasonably estimated.
5.
Adjust the inventory figure as of December 31, 2012, as required by a market price of $2.00 instead of $1.40,
applying the lower-of-cost-or-market principle. The actual quotation was a transitory error and no purchases had
been made at this quotation.
6.
Report the action of the new stock issue in a footnote to the balance sheet.
Concepts for Analysis 24-5 (a. only)
Test
Revenue
Profit/Loss
Identifiable Assets
Materiality Test Value
10% x $406,000 = $40,600
10% x $96,000** = $9,600
10% x $620,000 = $62,000
Segments Meeting Test*
Funeral $302,000; Cemetary $73,000
Funeral $74,000; Cemetary $18,000; Real Estate ($36,000)
Funeral $334,000; Cemetary $162,000; Real Estate $114,000
* amount for segment  materiality test value (profit/loss test on an absolute value basis)
** combined profit for segments reporting profit = $74,000 + $1,500 + $18,000 + $500 + $2,000 = $96,000
(this is greater than combined losses of segment reporting a loss)
Reportable segments based on materiality tests (since at least one test met): Funeral, Cemetary, & Real Estate
Additional considerations:
 Minimum 75% test: ($302,000 + $73,000 + $2,000) / $406,000 = 92.8%  75%  no additional reportable
segments need to be identified
 Maximum: 3  10  ok
 Interperiod comparability  would need to also include any other segments separately reported in 2012 or
2011 (assume 2013 is consistent)
Final Conclusion: Funeral, Cemetary, and Real Estate are “reportable” segments for which separate disclosures
are required; Floral, Dried Whey, and Limosine may be combined and reported as “other.”