The Auto Corporation has internal reporting for four divisions. The following data have been gathered for the year just ended.
.:.
1. Divisions A and B share production facilities. Joint product costs, depreciation, capital expenditures, and much of the identifiable assets are allocated one- third to Division A and the remainder to Division B.
2. Division C sells over 90% of its output to Division D on a cost- plus basis.
3. Unallocated corporate expenses not included above amount to $ 57,500.
Required
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1. From the preceding information, what are the operating segments that should be reported by the Auto Corporation? Explain your recommendation fully.
2. Prepare a schedule of supplementary financial information by segments, in accordance with IFRS 8 recommendations, based on the information provided above, together with a condensed consolidated SCI.
SOLUTION:
1. It would appear that Auto Corporation should report Divisions A and B as one operating segment and Divisions C and D as a second operating segment. Divisions A and B share production facilities. Therefore they are not really separable as individual segments. Most costs and assets are allocated to A and B, rather than being directly assignable. Division C is a producer of input to Division D. The profits of C are highly sensitive to the transfer price. There is likely to be little autonomy for C.
2.
Segment 1
Segment 2
Eliminate
Reconciled to Consolidated
External sales
$275,000
$105,000
$380,000
Inter-segment sales
—
60,000
(60,000)
-
275,000
165,000
380,000
Assignable operating expenses
155,000
85,000
(60,000)
180,000
Depreciation expense
35,000
37,500
72,500
190,000
122,500
252,500
Segment operating profit (loss)
$ 85,000
$ 42,500
$127,500
Unallocated corporate expenses
57,500
Entity profit before income taxes
$ 70,000
Segment Assets
$185,000
$200,000
$385,000
Segment liabilities
$ 45,000
$ 75,000
$120,000
Capital expenditures
$120,000
$ 40,000
$160,000
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