Question

Last year Tiemann Technologies reported \$10,500 of sales, \$6,250 of operating costs other than depreciation, and...

Last year Tiemann Technologies reported \$10,500 of sales, \$6,250 of operating costs other than depreciation, and \$1,300 of depreciation. The company had no amortization charges, it had \$5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by \$750. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

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Homework Answers

Answer #1

Now we need to compute the change in net income due to the increase in depriciation

we have the following

 Particulars Last Year (Amount in \$) This Year (Amount in \$) Sales (A) 10500 10500 Operating Cost Other than Depriciation (B) 6250 6250 Depriciation ('C) 1300 2050 EBIT (D = A- B- C) 2950 2200 Bonds Value (E) 5000 5000 Interest Rate on Bonds (F) 6.50% 6.50% Ineterest Expense (G = E x F) 325 325 PBT (H = D - G) 2625 1875 Tax (I = H x 35 %) 918.75 656.25 Profit after Tax / Net Income ( J = H -I) 1706.25 1218.75

The change in Net after Tax income = \$ 1706.25 - 1218.75 = \$ 487.5

The same can also be computed using the below formula

Change in after tax net profit = Increase in Depriciation x (1-Tax Rate)

Change in after tax net profit = \$ 750 x (1-0.35)

Change in after tax net profit = \$ 487.5

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