Chapter 8, Problem 39P

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

Additional Information

  •    First-quarter administrative costs include the $160,000 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.

To determine

Determine the amount of net income to be reported each quarter of the current year assuming that actual results do not vary from the estimates provided.

Answer to Problem 39P

The amount of net income to be reported each quarter of the current year assuming that actual results do not vary from the estimates provided is $361200, $448,200, $559,200, $679,200 respectively.

Explanation of Solution

Amount of net income to be reported each quarter of the current year:

Particulars	First quarter	Second quarter	Third quarter	Fourth quarter
Sales	$ 1,300,000	$      1,560,000	$   1,820,000	$    2,080,000
Less:
Cost of goods sold	$    430,000	$         510,000	$      580,000	$       630,000
Administrative costs	$    190,000	$         225,000	$      230,000	$       240,000
Advertising costs	$      25,000	$           25,000	$        25,000	$         25,000
Executive bonuses	$      19,000	$           19,000	$        19,000	$         19,000
Provision for bad debts	$      16,000	$           16,000	$        16,000	$         16,000
Annual maintenance costs	$      18,000	$           18,000	$        18,000	$         18,000
Pre-tax income	$    602,000	$         747,000	$      932,000	$    1,132,000
Less: Income tax	$    240,800	$         298,800	$      372,800	$       452,800
Net income	$    361,200	$         448,200	$      559,200	$       679,200

Table: (1)

Working note

Calculate insurance premium per quarter

$\begin{array}{c}\text{Insurance}\text{premium}\text{per}\text{quarter}=\frac{\$160,000}{4}\\ =\$40,000\end{array}$

Thus, insurance premium per quarter is $40,000

Calculate administrative expenses for the first quarter

$\begin{array}{c}\text{First}\text{quarter}\text{administrative}\text{expenses}=\$310,000-\$160,000\\ =\$150,000+\$40,000\\ =\$190,000\end{array}$

Thus, administrative expenses for the first quarter is $190,000

Insurance premium per quarter is added to the administrative expenses estimates given.

Advertising costs estimates are equally distributed in the four quarters.

Executive bonuses are equally distributed in four quarters.

Provision for bad debts is equally distributed in four quarters.

Annual maintenance costs are equally distributed in four quarters.

To determine

Determine the amount of net income to be reported each quarter of the current year assuming 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.

Answer to Problem 39P

The amount of net income to be reported each quarter of the current year assuming 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 is $361200, $448,200, $577,840, $701,840 respectively.

Explanation of Solution

Amount of net income to be reported each quarter of the current year:

Particulars	First quarter	Second quarter	Third quarter	Fourth quarter
Sales	$ 1,300,000	$      1,560,000	$   1,820,000	$    2,080,000
Less:
Cost of goods sold	$    430,000	$         510,000	$      580,000	$       630,000
Administrative costs	$    190,000	$         225,000	$      230,000	$       240,000
Advertising costs	$      25,000	$           25,000	$        25,000	$         25,000
Executive bonuses	$      19,000	$           19,000	$        19,000	$         19,000
Provision for bad debts	$      16,000	$           16,000	$        16,000	$         16,000
Annual maintenance costs	$      18,000	$           18,000	$        18,000	$         18,000
Pre-tax income	$    602,000	$         747,000	$      932,000	$    1,132,000
Less: Income tax	$    240,800	$         298,800	$      354,160	$       430,160
Net income	$    361,200	$         448,200	$      577,840	$       701,840

Table: (2)

Income tax rate is 40 percent for first and second quarter and it has changed to 38 percent in the third and fourth quarter.