Question

On January 1, 20X1, Company XYZ started operations. The company acquired a piece of equipment by issuing a note payable on that date. The note had a below market rate of interest.

Terms of the purchase of the equipment:

		Coupon rate	Market rate
Note payable	$200,000	1.25%	5.10%
Note term	6 years

The note is due in equal annual payments of principle and interest.

The company uses straight-line depreciation for book purposes.

Depreciation information on the equipment:

Useful life of the equipment, no salvage	8 years
20X1 Tax depreciation	$50,000
Tax rate	21%

The accountant ignored market rate when producing the below income statement.

Income Statement for the year ended December 31, 20X1

Sales	$656,000
Expenses	571,000
Depreciation expense	25,000
Interest expense	2,500
Pretax income	57,500
Tax expense	12,075
Net income	$44,425

What is the correct net income for 20X1?

Answer 1

sales	656000
expenses	-571000
depreciation expense	-25000
interest expense [200000 *5.10/100]	-10200
pretax income	49800
tax expense [21%]	-10458
Net income	39342