Question

In the previous year, a firm failed to record premium amortization of $40,000 and $30,000, 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:

Answer 1

Understated by $7,000.

Step-by-step explanation:

Particulars Amount ($)

Amortization of Premium on bonds payable 40000

Amortization of Premium on Investments (30000)

Understated Gain 10000

Less : Tax @ 30% ($10000*30%)(Deferred tax liability) (3000)

Understated Net Income 7000