# Income Taxes Question

I think this is wrong, if not please explain? 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) \$3,300 \$4,100 B) \$600 -\$200 C) \$3,900 \$3,900 Your answer: C was correct! Using SL: Yr. 1 Yr. 2 Revenue 15,000 15,000 Dep. 2,000 2,000 Pretax income 13,000 13,000 Tax Expense 3,900 3,900

CareerThruCFA Wrote: ------------------------------------------------------- > Using SL: > > Yr. 1 Yr. 2 > Revenue 15,000 15,000 > Dep. 2,000 2,000 > Pretax income 13,000 13,000 > Tax Expense 3,900 3,900 Definitely wrong since the above did not include the increase in revenue in year 2. However, I would like to understand what does the “incremental” word means in this case. It seems like the solution simply just calculate the tax expense for both years? I would think that the tax expense in year 1 is \$3900 and the incremental tax expense in year 2 is \$4500 (\$8400 of tax expense in year 2 minus \$3900 of tax expense in year 1). Thanks for the question bro.

Answer C is correct. “incremental” means any change over Previous Year and NOT any changes from now onwards. Revenue increase in Yr1, over Yr0 is 15,000. and Revenue increase in Yr2, over Yr1 is again 15,000.

My Apologies, I didn’t read the question properly and I was calculatiing the depreciation for the Rev(15000) instead of 6000, I don’t know what i was thinking.