Question

In: Accounting

At the end of the second quarter of 20X1, Malta Corporation assembled the following information: The...

At the end of the second quarter of 20X1, Malta Corporation assembled the following information:

  1. The first quarter resulted in a $106,000 loss before taxes. During the second quarter, sales were $1,216,000; purchases were $666,000; and operating expenses were $336,000.
  2. Cost of goods sold is determined using the FIFO method. The inventory at the end of the first quarter was reduced by $20,000 to a lower-of-cost-or-market figure of $94,000. During the second quarter, replacement costs recovered, and by the end of the period, market value exceeded the ending inventory cost by $17,250.
  3. The ending inventory is estimated using the gross profit method. The estimated gross profit rate is 46 percent.
  4. At the end of the first quarter, the effective annual tax rate was estimated at 45 percent. At the end of the second quarter, expected annual income is $680,000. An investment tax credit of $15,000 and dividends received deduction of $90,000 are expected for the year. The combined state and federal tax rate is 40 percent.
  5. The tax benefits from operating losses are assured beyond a reasonable doubt. Prior-years income totaling $50,000 is available for operating loss carrybacks.


Required:
a. Calculate the expected effective annual tax rate at the end of the second quarter for Malta.

b. Prepare the income statement for the second quarter of 20X1. Your solution should include a computation of income tax (or benefit) for the first and second quarters.

Solutions

Expert Solution

ANSWER

ESTIMATED EFFECTIVE ANNUAL RATE

INCOME FROM CONTINUING OPERATION = 680000

DIVIDENDS RECIEVED= 90000

ESTIMATED TAXABLE INCOME= 680000-90000= 590000

COMBINED TAXABLE RATE= 40%

ESTIMATED TAX BEFORE CREDITS = 590000 * 40%= 236000

BUSINESS TAX CREDIT= 15000

ESTIMATED INCOME TAX= 236000-15000= 221000

EFFECTIVE ANNUAL TAX RATE= 208000/680000 = .3058

= .3058*100= 30.58%

b) INCOME STATEMENT FOR SECOND QUARTER

BEGINNING INVENTORY = 94000

PURCHASES= 94000+666000 = 760000

ESTIMATED COST OF SALES = 1216000*(1-46%)

=1216000*54%

= 656640

ESTIMATED ENDING INVENTORY = 760000-656640= 103360

PARTICULARS AMOUNT AMOUNT
SALES 1216000
COGS
BEGINNING INVENTORY 94000
PURCHASES 666000
GOODS AVAILABLE 760000
ENDING INVENTORY -103360
656640
RECOVERY FROM LCM -20000 -636640
GROSS PROFIT 579360
OPERATING EXPENSE -336000
INCOME TAX BEFORE TAX 243360
INCOME TAX    -92342
NET INCOME 15018
INCOME BEFORE TAX
PERIOD CURRENT PERIOD YEAR TO DATE TAX RATE YEAR TO DATE PEVIOUSLY PROVIDED REPORTED THIS PERIOD
1 106000 106000 45% -47700 0 47770
2 243360 137360 30.58% 42004 -47770 89744

= 243360-106000= 137360

= 106000*45% = 47700

=137360*30.58%= 42004

=42002+47770= 89744

NET INCOME = 151018

* ALL FIGURES ARE IN DOLLARS

ekkarill92 answered 1 year ago
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