Question

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

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Sales	$	1,400,000		$	1,680,000		$	1,960,000		$	2,240,000
Cost of goods sold		444,000			524,000			594,000			644,000
Administrative costs		450,000			255,000			260,000			270,000
Advertising costs		0			140,000			0			0
Executive bonuses		0			0			0			84,000
Provision for bad debts		0			0			0			50,000
Annual maintenance costs		68,000			0			0			0

Additional Information

First-quarter administrative costs include the $190,000 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 the 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

Answer 1

Net Income, where Income tax rate is 40% throughout the year
	Quarter-$
	1	2	3	4
Sales	14,00,000	16,80,000	19,60,000	22,40,000
Less: Cost of goods sold	4,44,000	5,24,000	5,94,000	6,44,000
Gross Profits	9,56,000	11,56,000	13,66,000	15,96,000
Less:
Insurance premium ($ 190,000)	47,500	47,500	47,500	47,500
Other administrative costs	2,60,000	2,10,000	2,15,000	2,25,000
Advertising costs ( 140,000)	35,000	35,000	35,000	35,000
Executive bonus (84000)	21,000	21,000	21,000	21,000
Provison for bad debt (50,000)	12,500	12,500	12,500	12,500
Annual maintenance costs (68,000)	17,000	17,000	17,000	17,000
Sub-Total	3,93,000	1,33,000	1,33,000	1,33,000
Net Income	5,63,000	10,23,000	12,33,000	14,63,000
Less: Tax at 40%	2,25,200	4,09,200	4,93,200	5,85,200
Net Income after tax	3,37,800	6,13,800	7,39,800	8,77,800
Net Income, where income tax rate is revised into 38% in quarter 3. Which means that the rate of tax will be 38% in quarter 3 as well as quarter 4
	Quarter-$
	1	2	3	4
Sales	14,00,000	16,80,000	19,60,000	22,40,000
Less: Cost of goods sold	4,44,000	5,24,000	5,94,000	6,44,000
Gross Profits	9,56,000	11,56,000	13,66,000	15,96,000
Less:
Insurance premium ($ 190,000)	47,500	47,500	47,500	47,500
Other administrative costs	2,60,000	2,10,000	2,15,000	2,25,000
Advertising costs ( 140,000)	35,000	35,000	35,000	35,000
Executive bonus (84000)	21,000	21,000	21,000	21,000
Provison for bad debt (50,000)	12,500	12,500	12,500	12,500
Annual maintenance costs (68,000)	17,000	17,000	17,000	17,000
Sub-Total	3,93,000	1,33,000	1,33,000	1,33,000
Net Income	5,63,000	10,23,000	12,33,000	14,63,000
Less: Tax at 40% in Q1 & 2 / 38% in Q3 &4	2,25,200	4,09,200	4,68,540	5,55,940
Net Income after tax	3,37,800	6,13,800	7,64,460	9,07,060