TNR Corporation is preparing its budgeted income statement for the month of August. Budgeted sales are $18,000. Cost of goods sold is twice the amount of operating costs, and operating costs plus cost of goods sold equals 40% of net income. Return on sales (net income / sales) is anticipated to be 50%. TNR does not have any nonoperating items on its income statement.
TNR's expected income tax rate is:
A) 37.5%
B) 30.0%
C) None of the above (but can be determined)
D) Cannot be determined

Question

Quizplus · Accepted Answer

The return on sales is 50%, meaning net income is $9,000 (50% of $18,000). Let operating costs be x, then cost of goods sold is 2x. So, x + 2x = 3x = 40% of net income ($9,000), which is $3,600. Therefore, operating costs are $1,200 and cost of goods sold is $2,400. The income before tax is $9,000 - $3,600 = $5,400. The tax rate is ($9,000 - $5,400) / $9,000 = 37.5%.

TNR Corporation Is Preparing Its Budgeted Income Statement for the Month