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Budgeted gross profit is $490,460, selling and administrative expenses are $228,100 and the tax rate is 25%. What are budgeted income taxes?
A$65,590
B$122,615
C$57,025
D$52,472
Answer & Solution
Correct answer: A. $65,590
1. Tax is charged on income before taxes, not on gross profit.
2. Income before taxes is $490,460 minus $228,100, which is $262,360.
3. Income taxes are 25% of $262,360, which is $65,590.
4. Net income is then $262,360 minus $65,590, which is $196,770.
5. $122,615 taxes gross profit and ignores operating expenses entirely.
6. $57,025 taxes the selling and administrative expenses, which is not an income figure.
7. $52,472 applies a 20% rate to the right income figure, and 20% is the rate used by the other company in this comparison.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 7.9 Budgeted Income Statement_
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