Question

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

Sales	$	862,000
Cost of goods sold		432,000
Operating expenses		242,000

Additional Information

1. First-quarter income before taxes was $112,000, and the estimated effective annual tax rate was 40 percent. At the end of the second quarter, expected annual income is $660,000, and a dividend exclusion of $36,000 and a business tax credit of $15,000 are anticipated. The combined state and federal tax rate is 50 percent.
2. The $432,000 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.
3. The operating expenses of $242,000 include a $72,000 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):
  

Answer is complete but not entirely correct.

CHRIS, INC. Income Statement For Three Months Ended June 30, 20X2 Salesselected answer correct $862,000selected answer correct Cost of goods soldselected answer correct 537,000selected answer correct Gross profitselected answer correct $325,000 Operating expenseselected answer correct 188,000selected answer correct Income before taxesselected answer correct $137,000 Income taxesselected answer correct 66,650selected answer incorrect Net incomeselected answer correct $70,350

Answer 1

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Part a
Expected Income Second Quarter		$   660,000
Less: Dividend Exclusion		$    -36,000
Estimated Annaul Taxable Income		$   624,000
Combined Tax rate		50%
Estimated Annual Taxes		$   312,000
Less: Business Tax Credit		$    -15,000
Estimated Tax For year		$   297,000
Estimated Effective annual tax rate	$297,000/$660,000	45.00%
Part b
Sales		$   862,000
Less: Cost of Goods Sold	Working-1	$ -537,000
Gross Profit		$   325,000
Less: Operating Expense	$242,000-($72,000*75%)	$ -188,000
Income before tax		$   137,000
Less: Income Tax	Working-2	$    -67,250
Net Income		$     69,750
Working-1
Cost of Goods Sold Given		$   432,000
Add: LIFO Inventory Liquidation	7,500*($26-$12)	$   105,000
Adjusted Cost of Goods Sold		$   537,000
Working-2
	Income Before Tax		Estimated Effective	Tax Benefit
Period	Currenty	Cumulative	Annual Tax Rate	Year to Date	Less Previous	Reported in current
1	$                            112,000	$   112,000	40%	$        44,800	$                  -	$                     44,800
2	$                            137,000	$   249,000	45%	$      112,050	$          44,800	$                     67,250