Lafromboise Corporation has provided the following information concerning a capital budgeting project: The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 2 is:

Question

Lafromboise Corporation has provided the following information concerning a capital budgeting project:  The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 2 is:

Quizplus · Accepted Answer

To calculate the income tax expense in year 2, we need to calculate the taxable income in year 2 first. 
Taxable income in year 2 = Earnings before taxes - Depreciation expense - Interest expense - Operating loss carryforward
= $220,000 - $60,000 - $36,000 - $0
= $124,000
Income tax expense in year 2 = Taxable income in year 2 x Tax rate
= $124,000 x 0.34
= $42,160 (rounded to nearest thousand)
Therefore, the income tax expense in year 2 is $42,000 (Choice B).

Lafromboise Corporation Has Provided the Following Information Concerning a Capital