Madison Metals recently reported $9,000 of sales, $6,000 of operating costs other than depreciation, and $1,500 of depreciation. The company had no amortization charges and no non-operating income. It had issued $4,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate was 40%. What was the firm's taxable, or pre-tax, income?
To calculate the firm's taxable income, we need to start with its pretax income.
Pretax income can be calculated by subtracting operating costs (other than depreciation) and depreciation from sales.
Pretax income = Sales - Operating costs - Depreciation
Given:
Sales = $9,000
Operating costs other than depreciation = $6,000
Depreciation = $1,500
Pretax income = $9,000 - $6,000 - $1,500
Pretax income = $1,500
Therefore, the firm's taxable income, or pretax income, is $1,500.