Managerial Accounting Segment Reporting Homework Help
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1.Midwest Entertainment has four operating divisions: Bus Charters, Lodging, Concerts, and Ticket Services. Each division is a separate segment for financial reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in thousands)
|Bus Charters||Lodging||Concerts||Ticket Services|
Bus Charters Division participates in a frequent guest program with Lodging Division. During the past year, Bus Charters reported that it traded lodging award coupons for travel that had a retail value of $1.3 million, assuming that the travel was redeemed at full fares. Concerts Division offered 20 percent discounts to Midwest’s bus passengers and lodging guests. These discounts to bus passengers were estimated to have a retail value of $350,000. Midwest’s lodging guests redeemed $150,000 in concert discount coupons. Midwest’s hotels also provided rooms for Bus Charter’s employees (drivers and guides). The value of the rooms for the year was $650,000.
The Ticket Services Division sold chartered tours for Bus Charters valued at $200,000 for the year. This service for intracompany lodging was valued at $100,000. It also sold concert tickets for Concerts; tickets for intracompany concert admission were valued at $50,000.
While preparing all of these data for financial statement presentation, Lodging Division’s controller stated that the value of the bus coupons should be based on their differential and opportunity costs, not on the full fare. This argument was supported because travel coupons are usually allocated to seats that would otherwise be empty or that are restricted similar to those on discount tickets. If the differential and opportunity costs were used for this transfer price, the value would be $250,000 instead of $1.3 million. Bus Charter’s controller made a similar argument concerning the concert discount coupons. If the differential cost basis were used for the concert coupons, the transfer price would be $50,000 instead of the $350,000.
Midwest reports assets in each division as follows (dollars in thousands)
a. Using the retail values for transfer pricing for segment reporting purposes, what are the operating profits for each Midwest division?
b. What are the operating profits for each Midwest division using the differential cost basis for pricing transfers?
c. Rank each division by ROI using the transfer pricing methods in ( a ) and ( b ). What difference does the transfer pricing system have on the rankings?
2. Perth Corporation has two operating divisions, a casino and a hotel. The two divisions meet the requirements for segment disclosures. Before transactions between the two divisions are considered, revenues and costs are as follows
The casino and the hotel have a joint marketing arrangement by which the hotel gives coupons redeemable at casino slot machines and the casino gives discount coupons good for stays at the hotel. The value of the coupons for the slot machines redeemed during the past year totaled $12,000,000. The discount coupons redeemed at the hotel totaled $5,000,000. As of the end of the year, all coupons for the current year expired.
What are the operating profits for each division considering the effects of the costs arising from the joint marketing agreement?
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3. Leapin’ Larry’s Pre-Owned Cars has two divisions, Operations and Financing. Operations is responsible for selling Larry’s inventory as quickly as possible and purchasing cars for future sale. Financing Division takes loan applications and packages loans into pools and sells them in the financial markets. It also services the loans. Both divisions meet the requirements for segment disclosures under accounting rules.
Operations Division had $51 million in sales last year. Costs, other than those charged by Financing Division, totaled $39 million. Financing Division earned revenues of $12 million from servicing loans and incurred outside costs of $10 million. In addition, Financing charged Operations $6 million for loan-related fees. Operation’s manager complained to Larry that Financing was charging twice the commercial rate for loan-related fees and that Operations would be better off sending its buyers to an outside lender.
Financing’s manager replied that although commercial rates could be lower, servicing Larry’s loans is more difficult, thereby justifying the higher fees.
a. What are the reported segment operating profits for each division, ignoring income taxes and using the $6 million transfer price for the loan-related fees?
b. What are the reported segment operating profits for each division, ignoring income taxes and using a $3 million commercial rate as the transfer price for the loan-related fees?
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