Question

Check Noventis Corporation prepared the following estimates for the four quarters of the current year. $ First Quarter 1,300,eee 430,000 310,000 $ Second Quarter 1,560,000 510,000 185,000 100,000 Sales Cost of goods sold Administrative costs Advertising costs Executive bonuses Provision for bad debts Annual maintenance costs $ Third Quarter 1,820,000 580,000 190,000 $ Fourth Quarter 2,080,000 630,000 200,000 76,000 64,000 72,000 Additional Information • First-quarter administrative costs include the $160.000 annual insurance premium • Advertising costs paid in the second quarter relate to television advertisements that will be broadcast throughout the entire year. • No special items affect income during the year. • Noventis estimates an effective income tax rate for the year of 40 percent. ses a. Assuming that actual results do not vary from the estimates provided, determine the amount of net income to be reported each quarter of the current year. b. Assume that actual results do not vary from the estimates provided except for that in the third quarter, the estimated annual effective income tax rate is revised downward to 38 percent. Determine the amount of net income to be reported each quarter of the current year. Net Income a 1st Quarter 2nd Quarter 3rd Quarter Cuarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Answer 1

a.						First quarter	Second quarter	Third quarter	Fourth quarter
	Sales					1300000	1560000	1820000	2080000
	Less: Cost of goods sold					430000	510000	580000	630000
	Gross profit				a	870000	1050000	1240000	1450000
	Less:Operating expenses					.
	Administrative costs				(Note:1)	190000	225000	230000	240000
	Advertising costs				(100000/4)	25000	25000	25000	25000
	Executive bonuses				(76000/4)	19000	19000	19000	19000
	Provision for bad debts				(64000/4)	16000	16000	16000	16000
	Annual maintenance costs				(72000/4)	18000	18000	18000	18000
	Total operating expenses				b	268000	303000	308000	318000
	Income before tax				a-b	602000	747000	932000	1132000
	Less: income tax				(Note:2)	240800	298800	372800	452800
	Net income					361200	448200	559200	679200
	Note:1	Administrative costs
						First quarter	Second quarter	Third quarter	Fourth quarter
	Administrative costs excl. annual insurance premium					150000	185000	190000	200000
						(310000-160000)
	Annual insurance premium				(160000/4)	40000	40000	40000	40000
	Total					190000	225000	230000	240000
	Note:2	Income tax
						First quarter	Second quarter	Third quarter	Fourth quarter
	Income before tax					602000	747000	932000	1132000
	Cumulative income before tax				a	602000	1349000	2281000	3413000
	Effective income tax rate				b	40%	40%	40%	40%
	Cumulative income tax to be recognized				c=a*b	240800	539600	912400	1365200
	Less: Cumulative income tax recognized in prior periods					0	240800	539600	912400
	Income tax for this quarter					240800	298800	372800	452800
b.						First quarter	Second quarter	Third quarter	Fourth quarter
	Income before tax					602000	747000	932000	1132000
	Less: income tax				(Note:3)	240800	298800	327180	430160
	Net income					361200	448200	604820	701840
	Note:3	Income tax
						First quarter	Second quarter	Third quarter	Fourth quarter
	Income before tax					602000	747000	932000	1132000
	Cumulative income before tax				a	602000	1349000	2281000	3413000
	Effective income tax rate				b	40%	40%	38%	38%
	Cumulative income tax to be recognized				c=a*b	240800	539600	866780	1296940
	Less: Cumulative income tax recognized in prior periods					0	240800	539600	866780
	Income tax for this quarter					240800	298800	327180	430160