Noventis Corporation prepared the following estimates for the four quarters of t

Question

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

Additional Information

First-quarter administrative costs include the $200,000 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.

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.

First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Sales $ 1,500,000 $ 1,800,000 $ 2,100,000 $ 2,400,000 Cost of goods sold 450,000 530,000 600,000 650,000 Administrative costs 350,000 205,000 210,000 220,000 Advertising costs 0 180,000 0 0 Executive bonuses 0 0 0 92,000 Provision for bad debts 0 0 0 72,000 Annual maintenance costs 80,000 0 0 0

Explanation / Answer

a) Second Third Fourth First Quarter Quarter Quarter Quarter Sales $ 15,00,000 18,00,000 21,00,000 24,00,000 Cost of goods sold 4,50,000 5,30,000 6,00,000 6,50,000 Administrative costs 2,00,000 2,55,000 2,60,000 2,70,000 Advertising costs 0 60,000 60000 60000 Net operating income 8,50,000 9,55,000 11,80,000 14,20,000 Income tax at 40% 340000 382000 472000 568000 Net income 5,10,000 5,73,000 7,08,000 8,52,000 b) Second Third Fourth First Quarter Quarter Quarter Quarter Sales $ 15,00,000 18,00,000 21,00,000 24,00,000 Cost of goods sold 4,50,000 5,30,000 6,00,000 6,50,000 Administrative costs 2,00,000 2,55,000 2,60,000 2,70,000 Advertising costs 0 60,000 60000 60000 Net operating income 8,50,000 9,55,000 11,80,000 14,20,000 Income tax at 40%/38% 340000 382000 412300 539600 Net income 5,10,000 5,73,000 7,67,700 8,80,400 NOTE: Total tax due for the first three quarters = (850000+955000+1180000)*38% = 1134300 Tax accounted during the first 2 quarters = 722000 Tax to be accounted during the thiird quarter 412300

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