Early in January 2013, Hewitt, Inc., acquired a new machine and incurred $10,000

Question

Early in January 2013, Hewitt, Inc., acquired a new machine and incurred $10,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $99,000 on average total assets of $868,000 for 2013. Assume that the total cost of the new machine will be depreciated over 10 years using the straight-line method. c. Given your answers to part a and b, why would the company want to account for this expenditure as an expense? (Select all that apply.)

a. Expensing an item immediately increases company's net profit

b. Less time, effort and cost is spent for accounting purposes

c. Expensing an item immediately reduces the company's tax expense in the future

d. Expensing an item immediately reduces the company's tax expense

Explanation / Answer

The correct option is d. Expensing an item immediately reduces the company's tax expense

If the expenditure of $ 10,000 had been capitalized, and not expensed, depreciation expense to be charged for the year would have been $ 10,000 / 10 = $ 1,000. Therefore net operating income would have been $ 99,000 + $ 10,000 - $ 1,000 = $ 108,000 (i.e higher by $ 9,000), and the company's tax expense would have also been higher. But by expensing the amount immediately, the company's tax expense has been reduced.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.