Question

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

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Sales	$	1,500,000		$	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

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.

	Net Income a. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter b. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Answer 1

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