First Bank has some question as to the tax-free nature of $9 million of its municipal bond portfolio. This amount is excluded from First Bank’s taxable income of $65 million. Management has determined that there is a 65% chance that the tax-free status of this interest can’t withstand scrutiny of taxing authorities. Assuming a 40% tax rate, what amount of income tax expense should the bank report? (Enter your answer in million. Round your answer to 1 decimal place.)

Assuming a 40% tax rate, the amount of income tax expense should the bank report will be 40% x ($65 million + $5.85 million) = $28.34 million

Explanation:

First Bank has some question as to the tax-free nature of $9 million of its municipal bond portfolio. This amount is excluded from First Bank’s taxable income of $65 million.

Management has determined that there is a 65% chance that the tax-free status of this interest can’t withstand scrutiny of taxing authorities.

Therefore the amount of the $9 million to be included in the taxable income will be 65% x $9 million =  $5,850,000

Assuming a 40% tax rate, the amount of income tax expense should the bank report will be 40% x ($65 million + $5.85 million) = $28.34 million

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