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?

a. $1,180.

b. $1,220.

c. $1,260.

option (b) $1,220

Explanation:

Data provided in the question:

Total sales = $9,000

Operating cost = $6,000

Depreciation = $1,500

Bonds issued = $4,000

Interest rate = 7% = 0.07

Income tax rate = 40% = 0.4

Now,

The pretax income is calculated as:

Pretax income = Sales - operating costs - depreciation - interest expense

or

Pretax income = $9,000 - $6,000 - $1,500 - ($4,000 * 0.07)

or

The pretax income = $1,500 - $280

or

The pretax income = $1,220

Hence,

The correct answer is option (b) $1,220