Question

Chris Inc. has accumulated the following information for its second-quarter income statement for 20X2: Sales Cost of goods sold Operating expenses $ 860,000 430,000 240,000 Additional Information 1. First-quarter income before taxes was $110,000, and the estimated effective annual tax rate was 40 percent. At the end of the second quarter, expected annual income is $600,000, and a dividend exclusion of $30,000 and a business tax credit of $15,000 are anticipated. The combined state and federal tax rate is 50 percent. 2. The $430,000 cost of goods sold is determined by using the LIFO method and includes 7,500 units from the base layer at a cost of $12 per unit. However, you have determined that these units are expected to be replaced at a cost of $26 per unit. 3. The operating expenses of $240,000 include a $70,000 factory rearrangement cost incurred in April. You have determined that the second quarter will receive about 25 percent of the benefits from this project with the remainder benefiting the third and fourth quarters. Required: a. Calculate the effective annual tax rate expected at the end of the second quarter for Chris Inc. Answer is complete and correct. Estimated effective annual tax rate 45 %

Answer 1

a.

Estimate of effective annual tax rate at end of second quarter:
	Estimated  Annual Amounts
Income from continuing operations	$600,000
Less: Dividend exclusion	(30,000)
Estimated annual taxable income	$570,000
Combined tax rate	x     50%
Estimated annual taxes before credits	$285,000
Less: Business tax credit	(15,000)
Estimated income taxes for year	$270,000
Estimated effective annual tax rate ($270,000/$600,000)	=     45%

b.

Chris Inc. Income Statement for Second quarter
Sales	$860,000
Cost of goods sold (Computation provided below)	-5,35,000
Gross profit ( Sales - Cost of goods sold)	$325,000
Operating expense ($240,000 - $52,500
factory rearrangement deferred)	-1,87,500
Income before taxes	$137,500
Income taxes ( Calculation provided below )	(67,375)
Net income ( Income before taxes - Income Taxes)	$ 70,125

Workings:

Computation of Cost of Goods Sold
Cost of goods sold as given	$430,000
Add: LIFO inventory liquidation[7,500 x ($26 - $12)]	105,000
Adjusted cost of goods sold	$535,000

Computation of Income Taxes

	Income (Loss) before taxes		Estimated Effective Annual Tax rate	Tax (Benefit)
Interim period	Current Period	Year- to-date		Year-to-date	Less Previously Provided	Reported in this   Period
1	1,10,000	1,10,000	40%	44,000	-0-	44,000
2	1,37,500	2,47,500	45%	1,11,375	44,000	67,375