Chris Inc has accumulated the following information for its

Chris Inc. has accumulated the following information for its second-quarter income statement for 20X2:

Sales

$

860,000

Cost of goods sold

430,000

Operating expenses

240,000

Additional Information

First-quarter income before taxes was $110,000, and the estimated effective annual tax rate was 40 percent. At the end of the second quarter, expected annual income is $680,000, and a dividend exclusion of $38,000 and a business tax credit of $15,000 are anticipated. The combined state and federal tax rate is 50 percent.

The $430,000 cost of goods sold is determined by using the LIFO method and includes 7,500 units from the base layer at a cost of $12 per unit. However, you have determined that these units are expected to be replaced at a cost of $26 per unit.

The operating expenses of $240,000 include a $70,000 factory rearrangement cost incurred in April. You have determined that the second quarter will receive about 25 percent of the benefits from this project with the remainder benefiting the third and fourth quarters.

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

b. Prepare the income statement for the second quarter of 20X2. Your solution should include a computation of income tax (or benefit):

Solution

Solution: (a) Estimated Annual Income = 680000

Less: Dividend Exclusions = (38000)

Net Annual Income = 642000

Tax Rate = 50%

Tax Amount = 642000*50% = 321000

Tax Credit Available = 15000

Net Tax Payable = 321000 - 15000 = 306000

Annual Effective Rate of Tax = 306000/680000*100 = 45%

(b) Income Statement For the Second quarter of 20X2 :

Sales : $860000

Cost of Goods Sold : (541000)

Gross Profit : 319000

Operating Expense :$240000

Income before taxes : 79000

Income Tax = 79000*45% = 35550

Income After Taxes = 43450