In a debt write-down of $100, what is the impact on Net Income after tax?

In a debt write-down of $100, what is the impact on Net Income after tax?

• A. Net Income increases by $60.
• B. Net Income decreases by $60.
• C. Net Income increases by $40.
• D. Net Income remains unchanged.

Answer: (A)

A debt write-down increases expenses by the write-down amount, which lowers pretax income by 100. The tax shield from this deduction reduces taxes by the tax rate times the write-down. The after‑tax impact on net income is therefore -100 × (1 − tax rate). With a common 40% tax rate, that becomes -100 × 0.60 = -60, so net income falls by 60. If the tax rate were different, the after‑tax effect would adjust accordingly. In this typical scenario, the correct outcome is a decrease in net income of 60, not an increase.

A debt write-down increases expenses by the write-down amount, which lowers pretax income by 100. The tax shield from this deduction reduces taxes by the tax rate times the write-down. The after‑tax impact on net income is therefore -100 × (1 − tax rate). With a common 40% tax rate, that becomes -100 × 0.60 = -60, so net income falls by 60. If the tax rate were different, the after‑tax effect would adjust accordingly. In this typical scenario, the correct outcome is a decrease in net income of 60, not an increase.