Question

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

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Sales	$	1,150,000		$	1,380,000		$	1,610,000		$	1,840,000
Cost of goods sold		415,000			495,000			565,000			615,000
Administrative costs		280,000			170,000			175,000			185,000
Advertising costs		0			160,000			0			0
Executive bonuses		0			0			0			64,000
Provision for bad debts		0			0			0			58,000
Annual maintenance costs		66,000			0			0			0

Additional Information

First-quarter administrative costs include the $130,000 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.

Answer 1

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.

	First	Second	Third	Fourth
	Quarter	Quarter	Quarter	Quarter
Sales	1150000	1380000	1610000	1840000
Less:
Cost of goods sold	415000	495000	565000	615000
Administrative costs	182500	202500	207500	217500
Advertising costs	40,000	40,000	40,000	40,000
Executive bonuses	16000	16000	16000	16000
Provision for bad debts	14500	14500	14500	14500
Annual maintenance costs	16500	16500	16500	16500
Pre-tax income	465,500	595,500	750,500	920,500
Less: tax at 40%	186200	238200	300200	368200
Net income	279,300	357,300	450,300	552,300

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.

	First	Second	Third	Fourth
	Quarter	Quarter	Quarter	Quarter
Sales	1150000	1380000	1610000	1840000
Less:
Cost of goods sold	415000	495000	565000	615000
Administrative costs	182500	202500	207500	217500
Advertising costs	40,000	40,000	40,000	40,000
Executive bonuses	16000	16000	16000	16000
Provision for bad debts	14500	14500	14500	14500
Annual maintenance costs	16500	16500	16500	16500
Pre-tax income	465,500	595,500	750,500	920,500
Less: tax at	186200	238200	285190	349790
Net income	279,300	357,300	465,310	570,710

Working notes for the above answer:

W.N: a)

W.N: b)