Your client is seeking advice on each of the following interim reporting issues related to the current year:
1. In the first quarter of the current year, the client incurred $130,000 of research and development (R&D) costs that, hopefully, will generate additional revenues in the current and next four years. He is aware of the fact that the R&D will have to be expensed in its entirety in the current year. However, he is not sure how to report the item in the first-quarter financials. What advice would you give?
2. In the second quarter of the current year, your client revised his estimated effective annual tax rate on pretax income from continuing operations (PICO). The second-quarter tax expense expressed as a percentage of the second-quarter pretax PICO is greater than the statutory rate of tax. This confuses your client. What is the logical explanation for this?