What happens to Net Income if there is a $120 decrease in depreciation and a 30% tax rate is assumed?

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Multiple Choice

What happens to Net Income if there is a $120 decrease in depreciation and a 30% tax rate is assumed?

To understand the impact of a $120 decrease in depreciation on Net Income, it’s essential to recognize how depreciation, tax rates, and income calculations interrelate. When depreciation decreases, it reduces the total expenses reported by the company. In this case, a decrease of $120 in depreciation will increase the pre-tax income by the same amount, since depreciation is an expense that lowers taxable income. Next, we consider the tax implications of the increased pre-tax income. With a 30% tax rate applied to the additional income gained from the decreased depreciation, the tax effect is calculated as: Tax impact = Decrease in Depreciation × Tax Rate Tax impact = $120 × 30% = $36 With the pre-tax income increasing by $120 and the tax expense of $36 due to the lower depreciation, we find the after-tax net change to income: Net change to Net Income = Increase in pre-tax income - Tax impact Net change to Net Income = $120 - $36 = $84 As a result, the Net Income would increase by this amount. In conclusion, by decreasing depreciation, which lowers expenses, the overall Net Income rises after accounting for tax savings, leading to an increase of $84 in

To understand the impact of a $120 decrease in depreciation on Net Income, it’s essential to recognize how depreciation, tax rates, and income calculations interrelate.

When depreciation decreases, it reduces the total expenses reported by the company. In this case, a decrease of $120 in depreciation will increase the pre-tax income by the same amount, since depreciation is an expense that lowers taxable income.

Next, we consider the tax implications of the increased pre-tax income. With a 30% tax rate applied to the additional income gained from the decreased depreciation, the tax effect is calculated as:

Tax impact = Decrease in Depreciation × Tax Rate

Tax impact = $120 × 30% = $36

With the pre-tax income increasing by $120 and the tax expense of $36 due to the lower depreciation, we find the after-tax net change to income:

Net change to Net Income = Increase in pre-tax income - Tax impact

Net change to Net Income = $120 - $36 = $84

As a result, the Net Income would increase by this amount. In conclusion, by decreasing depreciation, which lowers expenses, the overall Net Income rises after accounting for tax savings, leading to an increase of $84 in

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