Deferred/Income tax question
This question was from the income/deferred tax reading (44) from Schweser QBank,
A firm purchased a piece of equipment for $6,000 with the following information provided:
* Revenue will increase by $15,000 per year.
* The equipment has a 3-year life expectancy and no salvage value.
* The firm’s tax rate is 30%.
* Straight-line depreciation is used for financial reporting and double declining balance is used for tax purposes.
Calculate the incremental income tax expense for financial reporting for years 1 and 2.
Year 1 Year 2
A) $4,500 $4,500
B) $600 -$200
C) $3,900 $3,900
D) $3,300 $4,100
I know what income tax expense is, but what the heck is incremental income tax expense?
I thought they might be alluding to the +/- from deferred tax liability/asset, but as it turned out, the answer to this question was C, and in the solution all they did was multiply the pretax income by the tax rate (30%)…am I missing something important here or were the question makers smoking some good stuff when they wrote this question?
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