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Brown Office Supplies recently reported $18,000 of sales, $8,250 of operating costs other than depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's earnings before taxes (EBT)

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Answer:

EBT=  $7,370

Explanation:

The earnings before tax is the sales revenue less operating cost, depreciation and interest on loan. Interest on loan must be deducted as finance cost because it is an allowable expense that gives the business some savings in tax expense.

Interest on loan =  7.0% × $9,000 = 630

Earnings before tax = 18,000-8,250 - 1,750 - 630

                              = $7,370

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