On January 1, 20X1, Company ABC started operations. The company acquired a piece of equipment by issuing a note payable on that date. The note had a below market rate of interest.

Terms of the purchase of the equipment:

		Coupon rate	Market rate
Note payable	$852,000	1.30%	6.25%
Note term	5 years

The note is due in equal annual payments of principle and interest.

The company uses straight-line depreciation for book purposes.

Depreciation information on the equipment:

Useful life of the equipment, no salvage	10 years
20X1 Tax depreciation	$100,000
Tax rate	21%

The accountant ignored market rate when producing the below income statement.

Income Statement for the year ended December 31, 20X1

Sales	$1,435,800
Expenses	1,206,000
Depreciation expense	85,200
Interest expense	11,076
Pretax income	133,524
Tax expense	28,040
Net income	$105,484

What is the correct net income for 20X1?

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The book answer is 86,419...

Somehow I keep getting miles off on this answer, The professor uploaded an explanation that makes less sense:

Interest expense, depreciation expense and therefore pretax income, tax expense and net income will all need to be udpated.

Interest expense in 20X1 = fair value of the note/equipment = 740,975 times the market rate of interest of 6.25% = 46,311.

Depreciation expense in 20X1 = fair value of the note/equipment = 740,975 / 10 year useful life = 74,098

Corrected pretax income = 109,392

Need to compute corrected tax expense = Pretax income times 21%

Need to compute corrected net income