A stationery company plans to launch a new type of indelible ink pen.Advertising for the new product will be heavy and will cost the company $10 million,although the company expects general revenues of $280 million next year from sources other than sales of the new pen.If the company has a corporate tax-rate of 40% on its pretax income,what effect will the advertising for the new pen have on its taxes?
A)Increase taxes by $10 million
B)Increase taxes by $4 million
C)It will have no effect on taxes.
D)Reduce taxes by $4 million

Question

Quizplus · Accepted Answer

The $10 million advertising expense is tax-deductible, reducing taxable income by $10 million. With a 40% tax rate, taxes are reduced by 40% of $10 million, which is $4 million.

A Stationery Company Plans to Launch a New Type of Indelible