In the previous year, a firm failed to record premium amortization of $40,800 and $28,300, respectively, on its bonds payable and held to maturity bond investments. These errors affect both income before tax and taxable income. The firm's tax rate is 30%. As a result of this error, net income was:

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Business

20 January, 07:52

In the previous year, a firm failed to record premium amortization of $40,800 and $28,300, respectively, on its bonds payable and held to maturity bond investments. These errors affect both income before tax and taxable income. The firm's tax rate is 30%. As a result of this error, net income was:

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Answers (1)

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Fido · Answer 1

The correct answer is $8,750 (Understated).

Explanation:

According to the scenario, the computation of the given data are as follows:

we can calculate the net income by using following formula:

Net income = Understated gain - Tax amount

Where, Understated gain = $40,800 - $28,300 = $12,500

So, Tax on $12,500 = $12,500 * 30% = $3,750

By putting the value, we get

Net income = $12,500 - $3,750

= $8,750 (Understated)