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11 June, 05:01

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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  1. 11 June, 05:28
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    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)
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