Question

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:

Answer 1

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

Step-by-step 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)