[question removed by moderator]
The right is B. Could anyone explain me how?
Reduce revenue by 50 and increase expenses by 100 which were improperly capitalized and hence must be expensed. Net effect is decrease in pre tax income by 150. Apply tax rate of 25 percent you get 150×.75 you get 112.5
Why the net effect is 150. I thought the net effect should be 50 (100-50).
Improperly recognized Revenue had increased the pretax income by 50 so it should be reversed hence revenue would go down by 50.
Improperly Capitalized expenses means assets had increased with no effect on income statement (for simplicity assume 100 percent equity finance so no corresponding interest charge on IS). To properly recognized those expenses assets will be reduced and entire amount will be expensed from IS. Hence expenses will be increased. Increasing expenses and decreasing revenue both have the negative effect on income which is 150
Thanks a lot. Now I got it
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