The projected income statement of Eastern company is given below:
Eastern company wants to start a training program that would cost $20,000. The training program is a tax deductible expense. The tax rate of Eastern company is 30%.
- Prepare a new projected income statement of Eastern company to show the effect of training program on net operating income and income tax.
- What would be the after-tax cost of training program.
(1) Projected income statement with training program:
(2) Computation of after-tax cost of training program:
Because the training program is a tax deductible expense, it would reduce the taxable income of the company by $20,000 and reduce the income tax by $6,000 ($39,000 – 33,000). The after-tax cost of training program would, therefore, be $14,000 ($20,000 – $6,000).
Alternatively, we can compute the after-tax cost easily by using after-tax cost formula:
After-tax cost = (1 – tax rate) × Tax deductible expense
= (1 – 0.3) × $20,000
= 0.7 × $20,000
= $14,000Next page is: Exercise-20 (Payback and accounting rate of return method)
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