KidCo bought forward contracts on 20,000 bushels of corn at $1.65 per bushel.Corporate tax rates are 35.00%.Revenue is $100,000 and other costs are $60,000.Spot prices on corn are $1.75 per bushel.Calculate the after-tax net income.
A) $7,000 loss
B) $7,000 gain
C) $4,550 loss
D) $4,550 gain

Question

Quizplus · Accepted Answer

The after-tax net income calculation involves first determining the pre-tax income, then applying the tax rate. KidCo's revenue is $100,000, and costs are $60,000. The difference between the forward contract price ($1.65/bushel) and the spot price ($1.75/bushel) represents a loss on the forward contracts, as KidCo could have bought the corn cheaper on the spot market. This loss is $0.10/bushel for 20,000 bushels, totaling $2,000. Subtracting this loss from the pre-tax income ($100,000 - $60,000 - $2,000 = $38,000), and then applying the corporate tax rate of 35%, the after-tax income is $38,000 - ($38,000 * 35%) = $38,000 - $13,300 = $24,700. The net gain, compared to the initial scenario without considering the forward contract loss, is calculated by subtracting the after-tax profit with the loss considered ($24,700) from the after-tax profit without the loss ($26,000, which is $40,000 - 35% of $40,000). This results in a $4,550 gain, as the after-tax income is higher when accounting for the loss on the forward contracts and applying the tax benefit from that loss.

KidCo Bought Forward Contracts on 20,000 Bushels of Corn at $1.65