Question

From the following details, calculate net profit before tax: Net Profit after tax = Rs. 50,000
15% Long-term debt = Rs. 12,00,000
Tax rate = 20%

• A. 1,80,000
• B. 1,50,000
• C. 62,500
• D. 72,500

Hint:

Always check carefully: If the question says Net Profit before tax (PBT), use PAT ÷ (1 – Tax rate). If they want EBIT, then add interest to PBT.

Answer 1

The Correct Option is B

Step 1: Relationship between Profit After Tax (PAT) and Profit Before Tax (PBT).
PAT is derived from PBT by subtracting tax.
The formula is: PAT = PBT – Tax.
Alternatively: PAT = PBT × (1 – Tax rate).

Step 2: Applying the formula.
Given: PAT = Rs 50,000.
Tax rate = 20% or 0.20.
Substituting these values into the formula: \[50,000 = PBT \times (1 - 0.20) = PBT \times 0.80\]

Step 3: Calculating PBT.
Rearranging the equation to solve for PBT: \[PBT = \frac{50,000}{0.80} = 62,500\]

Step 4: Adjusting for interest on long-term debt.
The PBT calculated in Step 3 represents Profit Before Tax but *after* deducting interest expenses.
The objective is to determine the Net Profit before tax and *before* interest. Calculation of Interest on long-term debt: 15% of 12,00,000 = Rs 1,80,000. Therefore, Net Profit Before Tax (NPBT) = PBT (after interest) + Interest on long-term debt
NPBT = 62,500 + 1,80,000 = Rs 2,42,500.

Step 5: Verification against options.
Consideration: The question may refer to "Net Profit before tax but after interest," which is a common convention in examinations. If this is the case, the answer is Rs 62,500.
However, if interest is to be included (following a true EBIT approach), the value would be Rs 2,42,500. Given that Rs 2,42,500 is not among the provided options, the correct selection from the available choices is: \[\boxed{62,500}\]