CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

A company is considering making material adaptations to its warehouse and equipment. The costs will be $25,000,000, with a benefit period of 10 years. The income tax rate during this period will be 30%. The company is considering the effects of capitalizing the cost versus expensing the cost. In year one, which of the following would be true concerning post-tax income?
A. Expensing would cause $25,000,000 less in net income.
B. Expensing would cause $22,500,000 less in net income
C. Expensing would cause $15,750,000 less in net income.
Explanation: In the first year, expenses would be $25,000,000 if the cost was expensed. If the cost was capitalized, expenses would be $2,500,000 ($25,000,000/10). The difference in the expenses is $22,500,000, before the tax effect, and $15,750,000 after taxes ($22,500,000 x .7). If the costs were expensed in the first year, net income would be $15,750,000 less.

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