If Depreciation increases by 10 and the tax rate is 40%, what is the impact on Net Income?

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Enhance your accounting skills for the PSIA Accounting Exam. Use flashcards and multiple-choice questions to prepare effectively with hints and explanations. Get set for your exam success!

Multiple Choice

If Depreciation increases by 10 and the tax rate is 40%, what is the impact on Net Income?

Explanation:
Depreciation acts as an expense that lowers pretax income. If depreciation increases by 10, pretax income falls by 10. Taxes drop by 40% of that amount, so tax expense decreases by 4. Net income changes by the drop in pretax income minus the tax savings: -10 + 4 = -6. So net income decreases by 6. This reflects the after‑tax cost of the depreciation, which is 60% of the depreciation amount.

Depreciation acts as an expense that lowers pretax income. If depreciation increases by 10, pretax income falls by 10. Taxes drop by 40% of that amount, so tax expense decreases by 4. Net income changes by the drop in pretax income minus the tax savings: -10 + 4 = -6. So net income decreases by 6. This reflects the after‑tax cost of the depreciation, which is 60% of the depreciation amount.

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