Noventis Corporation prepared the following estimates for the four quarters of t
ID: 342167 • Letter: N
Question
Noventis Corporation prepared the following estimates for the four quarters of the current year: Second Quarter $ 1,250,000 $1,500,000 $1,750,000 First Quarter Third Quarter Fourth Quarter Sales Cost of goods sold Administrative costs Advertising costs Executive bonuses Provision for bad debts Annual maintenance costs 425,000 300,00e 505,000 180,000 200,000 2,000,000 625,000 195,000 575,000 185,000 72,000 62,000 70,000 Additional Information . First-quarter administrative costs include the $150,000 annual insurance premium . Advertising costs paid in the second quarter relate to television advertisements that will be broadcast throughout the entire year . No special items affect income during the year . Noventis estimates an effective income tax rate for the year of 40 percent. a. Assuming that actual results do not vary from the estimates provided, determine the amount of net income to be reported each quarter of the current year. b. Assume that actual results do not vary from the estimates provided except for that in the third quarter, the estimated annual effective income tax rate is revised downward to 38 percent. Determine the amount of net income to be reported each quarter of the current year Net Income a. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter b. 1st Quarter 2nd Quarter rd Quarter 4th QuarterExplanation / Answer
Solution (a)
Calculation of Net Income amount to be reported each quarter of the current year assuming that actual results do not vary from the estimates provided
Particulars
1st Quarter Amount ($)
2nd Quarter Amount ($)
3rd Quarter Amount ($)
4thQuarter Amount ($)
Sales
1,250,000
1,500,000
1,750,000
2,000,000
Less: Cost of goods sold
(425,000)
(505,000)
(575,000)
(625,000)
Less: Administrative cost *
(187,500)
(217,500)
(222,500)
(232,500)
Less: Advertising cost**
($ 2,00,000 /4 = $ 50,000 per quarter)
(50,000 )
(50,000 )
(50,000 )
(50,000 )
Less: Executive bonus ***
($ 72,000 /4 =$ 18,000 per quarter)
(18,000)
(18,000)
(18,000)
(18,000)
Less: Provision for bad debts****
($ 62,000 /4 = $ 15,500 per quarter)
(15,500 )
(15,500 )
(15,500 )
(15,500 )
Less: Annual maintenance cost *****
($ 70,000 /4 =$ 17,500 per quarter)
(17,500)
(17,500)
(17,500)
(17,500)
Income Before Tax
536,500
676,500
851,500
1,041,500
Less: Income Tax @ 40% (calculated 40% of income before tax )
(214,600)
(270,600)
(340,600)
(416,600)
Net Income
321,900
405,900
510,900
624,900
*Administrative cost
$ 150,000 of administrative cost should be reduced or deducted from the first quarter and the amount of $ 150,000 should be equally distributed to all the quarters as the amount given is annual insurance premium.
Particulars
1st Quarter Amount ($)
2nd Quarter Amount ($)
3rd Quarter Amount ($)
4thQuarter Amount ($)
Administrative cost (Given)
300,000
180,000
185,000
195,000
Less: Annual insurance premium included in 1st Quarter
(150,000)
-
-
-
150,000
180,000
185,000
195,000
Add: Annual Insurance premium equally distributed to all quarters. ($ 150,000 /4 =$ 37,500 per quarter)
37,500
37,500
37,500
37,500
Administrative cost
187,500
217,500
222,500
232,500
**Adverting cost should be equally distributed among all the four quarters instead of any one quarter as it is related to television advertisements that will be broadcast throughout the entire year.
***Executive bonus should be equally distributed among all the four quarters instead of any one quarter as it is related to the full accounting year.
****Provision for bad debts should be equally distributed among all the four quarters instead of any one quarter as it is related to the entire year.
*****Annual maintenance cost should be equally distributed among all the four quarters instead of any one quarter as it is related to the full accounting year.
Solution (b)
Calculation of Net Income amount to be reported each quarter of the current year assuming that actual results do not vary from the estimates provided except for that in third quarter, the estimated effective annual tax rate is revised downward to 38%.
Particulars
1st Quarter Amount ($)
2nd Quarter Amount ($)
3rd Quarter Amount ($)
4thQuarter Amount ($)
Sales
1,250,000
1,500,000
1,750,000
2,000,000
Less: Cost of goods sold
(425,000)
(505,000)
(575,000)
(625,000)
Less: Administrative cost *
(187,500)
(217,500)
(222,500)
(232,500)
Less: Advertising cost**
($ 2,00,000 /4 = $ 50,000 per quarter)
(50,000 )
(50,000 )
(50,000 )
(50,000 )
Less: Executive bonus ***
($ 72,000 /4 =$ 18,000 per quarter)
(18,000)
(18,000)
(18,000)
(18,000)
Less: Provision for bad debts****
($ 62,000 /4 = $ 15,500 per quarter)
(15,500 )
(15,500 )
(15,500 )
(15,500 )
Less: Annual maintenance cost *****
($ 70,000 /4 =$ 17,500 per quarter)
(17,500)
(17,500)
(17,500)
(17,500)
Income Before Tax
536,500
676,500
851,500
1,041,500
Less: Income Tax @ 40% in 1st and 2nd quarter and @ 38% in 3rd and 4th quarter (calculated tax rate of income before tax )
(214,600)
(270,600)
(323,570)
(395,770)
Net Income
321,900
405,900
527,930
645,730
Answers
a.
Net Income ($)
1st Quarter
321,900
2nd Quarter
405,900
3rd Quarter
510,900
4thQuarter
624,900
b.
Net Income ($)
1st Quarter
321,900
2nd Quarter
405,900
3rd Quarter
527,930
4thQuarter
645,730
Good Luck.
Particulars
1st Quarter Amount ($)
2nd Quarter Amount ($)
3rd Quarter Amount ($)
4thQuarter Amount ($)
Sales
1,250,000
1,500,000
1,750,000
2,000,000
Less: Cost of goods sold
(425,000)
(505,000)
(575,000)
(625,000)
Less: Administrative cost *
(187,500)
(217,500)
(222,500)
(232,500)
Less: Advertising cost**
($ 2,00,000 /4 = $ 50,000 per quarter)
(50,000 )
(50,000 )
(50,000 )
(50,000 )
Less: Executive bonus ***
($ 72,000 /4 =$ 18,000 per quarter)
(18,000)
(18,000)
(18,000)
(18,000)
Less: Provision for bad debts****
($ 62,000 /4 = $ 15,500 per quarter)
(15,500 )
(15,500 )
(15,500 )
(15,500 )
Less: Annual maintenance cost *****
($ 70,000 /4 =$ 17,500 per quarter)
(17,500)
(17,500)
(17,500)
(17,500)
Income Before Tax
536,500
676,500
851,500
1,041,500
Less: Income Tax @ 40% (calculated 40% of income before tax )
(214,600)
(270,600)
(340,600)
(416,600)
Net Income
321,900
405,900
510,900
624,900
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