Question

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

First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Sales $ 1,575,000 $ 1,890,000 $ 2,205,000 $ 2,520,000
Cost of goods sold 458,000 538,000 608,000 658,000
Administrative costs 380,000 220,000 225,000 235,000
Advertising costs 0 120,000 0 0
Executive bonuses 0 0 0 104,000
Provision for bad debts 0 0 0 78,000
Annual maintenance costs 86,000 0 0 0

Additional Information

  • First-quarter administrative costs include the $120,000 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.

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 4th Quarter b. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

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Answer #1
a)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Sales 15,75,000 18,90,000 22,05,000 25,20,000
Cost of goods sold 4,58,000 5,38,000 6,08,000 6,58,000
Gross Profit 11,17,000 13,52,000 15,97,000 18,62,000
Administrative costs     2,90,000.00                2,50,000.00          2,55,000.00         2,65,000.00
Advertising costs        30,000.00                   30,000.00             30,000.00            30,000.00
Executive bonuses        26,000.00                   26,000.00             26,000.00            26,000.00
Provision for bad debts        19,500.00                   19,500.00             19,500.00            19,500.00
Annual maintenance costs        21,500.00                   21,500.00             21,500.00            21,500.00
Pretax Income $ 7,30,000.00 $          10,05,000.00 $    12,45,000.00 $   15,00,000.00
Income Tax * $ 2,92,000.00 $            4,02,000.00 $      4,98,000.00 $     6,00,000.00
Net Income $ 4,38,000.00 $            6,03,000.00 $      7,47,000.00 $     9,00,000.00
*Calculation of income tax by quarter
Pretax Income $ 7,30,000.00 $          10,05,000.00 $    12,45,000.00 $   15,00,000.00
Cumulative Pretax Income $ 7,30,000.00 $          17,35,000.00 $    29,80,000.00 $   44,80,000.00
Estimated Tax Rate x 40% x 40% x 40% x 40%
Cumulative income tax to be recognized to date = Cumulative Pretax income x 40% $ 2,92,000.00 $            6,94,000.00 $    11,92,000.00 $   17,92,000.00
Less: Cumulative income tax recognized in earlier period 0 $            2,92,000.00 $      6,94,000.00 $   11,92,000.00
Income tax this quarter $ 2,92,000.00 $            4,02,000.00 $      4,98,000.00 $     6,00,000.00
b)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Sales 15,75,000 18,90,000 22,05,000 25,20,000
Cost of goods sold 4,58,000 5,38,000 6,08,000 6,58,000
Gross Profit 11,17,000 13,52,000 15,97,000 18,62,000
Administrative costs     2,90,000.00                2,50,000.00          2,55,000.00         2,65,000.00
Advertising costs        30,000.00                   30,000.00             30,000.00            30,000.00
Executive bonuses        26,000.00                   26,000.00             26,000.00            26,000.00
Provision for bad debts        19,500.00                   19,500.00             19,500.00            19,500.00
Annual maintenance costs        21,500.00                   21,500.00             21,500.00            21,500.00
Pretax Income $ 7,30,000.00 $          10,05,000.00 $    12,45,000.00 $   15,00,000.00
Income Tax * $ 2,92,000.00 $            4,02,000.00 $      4,38,400.00 $     5,70,000.00
Net Income $ 4,38,000.00 $            6,03,000.00 $      8,06,600.00 $     9,30,000.00
*Calculation of income tax by quarter
Pretax Income $ 7,30,000.00 $          10,05,000.00 $    12,45,000.00 $   15,00,000.00
Cumulative Pretax Income $ 7,30,000.00 $          17,35,000.00 $    29,80,000.00 $   44,80,000.00
Estimated Tax Rate x 40% x 40% x 38% x 38%
Cumulative income tax to be recognized to date = Cumulative Pretax income x tax rate $ 2,92,000.00 $            6,94,000.00 $    11,32,400.00 $   17,02,400.00
Less: Cumulative income tax recognized in earlier period 0 $            2,92,000.00 $      6,94,000.00 $   11,32,400.00
Income tax this quarter $ 2,92,000.00 $            4,02,000.00 $      4,38,400.00 $     5,70,000.00



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