Jim’s Jeans is located in Florida and hopes to tap into the spending of the state’s retired population. Jim’s Jeans pays a tax rate of 35% and their income before taxes and extraordinary items was $400,000. If Jim’s Jeans suffered a tax-deductible extraordinary loss of $100,000, what is their net income?
Explanation
Answer - E - The Net Income would be $195,000, which is their operating income − the loss x (1 − tax rate %).
Key Takeaway: The tax deductible extraordinary loss reduced the taxable income, so the net income was found to be:
Operating Income 400,000
Tax-Deductible Loss 100,000
Taxable Income 300,000
300,000 x (1 − .35) = $195,000
