Question

Noventis Corporation prepared the following estimates for the four quarters of the current year:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Sales	$	1,550,000		$	1,860,000		$	2,170,000		$	2,480,000
Cost of goods sold		456,000			536,000			606,000			656,000
Administrative costs		390,000			225,000			230,000			240,000
Advertising costs		0			140,000			0			0
Executive bonuses		0			0			0			60,000
Provision for bad debts		0			0			0			80,000
Annual maintenance costs		88,000			0			0			0

Additional Information

• First-quarter administrative costs include the $130,000 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.

1. 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.

2. 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.

Answer 1

Solution-1 ( Effective Income tax Rate 40%)
	Quarter-$
	First Qtr	Second Qtr	Third Qtr	Fourth Qtr
Sales	$1,550,000	$1,860,000	$2,170,000	$2,480,000
Less: Cost Of Goods Sold	$456,000	$536,000	$606,000	$656,000
Gross Profits (a)	$1,094,000	$1,324,000	$1,564,000	$1,824,000
Less:
Insurance Premium (130000/4)	$32,500	$32,500	$32,500	$32,500
Other Administrative Costs	$260,000	$225,000	$230,000	$240,000
Advertising Costs ( 140,000/4)	$35,000	$35,000	$35,000	$35,000
Executive Bonus (60000/4)	$15,000	$15,000	$15,000	$15,000
Provison For Bad Debt (80,000/4)	$20,000	$20,000	$20,000	$20,000
Annual Maintenance Costs (88,000/4	$22,000	$22,000	$22,000	$22,000
Total Expense (b)	$384,500	$349,500	$354,500	$364,500
Net Income (c=a-b)	$709,500	$974,500	$1,209,500	$1,459,500
Less: Tax (cx40%)	$283,800	$389,800	$483,800	$583,800
Net Income After Tax	$425,700	$584,700	$725,700	$875,700
Solution-2 ( Effective Income tax Rate 38% from 3rd Qtr onward
	Quarter-$
	First Qtr	Second Qtr	Third Qtr	Fourth Qtr
Sales	$1,550,000	$1,860,000	$2,170,000	$2,480,000
Less: Cost Of Goods Sold	$456,000	$536,000	$606,000	$656,000
Gross Profits (a)	$1,094,000	$1,324,000	$1,564,000	$1,824,000
Less:
Insurance Premium (130000/4)	$32,500	$32,500	$32,500	$32,500
Other Administrative Costs	$260,000	$225,000	$230,000	$240,000
Advertising Costs ( 140,000/4)	$35,000	$35,000	$35,000	$35,000
Executive Bonus (60000/4)	$15,000	$15,000	$15,000	$15,000
Provison For Bad Debt (80,000/4)	$20,000	$20,000	$20,000	$20,000
Annual Maintenance Costs (88,000/4	$22,000	$22,000	$22,000	$22,000
Total Expense (b)	$384,500	$349,500	$354,500	$364,500
Net Income (c=a-b)	$709,500	$974,500	$1,209,500	$1,459,500
Less: Tax (cx40%) or (cX38%)	$283,800	$389,800	$459,610	$554,610
Net Income After Tax	$425,700	$584,700	$749,890	$904,890