Answered: Little bugs incorporation recently…

Little bugs incorporation recently reported 3 million of net income as earnings before interest text was six million and is tax rate was 40% each what was its interest expense

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter6: Accounting For Financial Management

Section: Chapter Questions

Problem 3P

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Concept explainers

Fringe Benefit Tax

Fringe benefits are in addition to the compensation that companies give to their employees. It is an additional benefit above the stated salary. It helps to keep the employees of the firm motivated as sometimes the only salary is not enough to retain the quality employees of the firm. There are different types of fringe benefits. Fringe benefits are given in both private as well as public enterprises.

Question

Little bugs incorporation recently reported 3 million of net income as earnings before interest text was six million and is tax rate was 40% each what was its interest expense

Expert Solution

Step 1

Net Income = $3,000,000

Earnings before Interest and Tax = $6,000,000

Tax Rate = 40% or 0.40

Calculation of Interest Expense is as follows:

Net Income
Interest Expense = EBIT
1-Tax Rate
$3,000,000
= $6, 000, 000 –
1-0.40
$3,000,000
= $6,000, 000 –
0.60
= $6, 000, 000 – $5,000,000
= $1,000,000

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