A Tax Shield Is Equal to the Reduction in a Firm's

question 39

Multiple Choice

A tax shield is equal to the reduction in a firm's:

• A) total tax liability resulting from a tax deductible expense.
• B) taxable income resulting from depreciation.
• C) taxable income resulting from a decrease in long-term debt.
• D) net income caused by depreciation.

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Definitions:

Tax Accounting

The area of accounting that deals with preparing tax returns and planning for future tax obligations.

Depletion

An accounting method used to allocate the cost of extracting natural resources over the period of their extraction.

Depreciation

A method of allocating the cost of a tangible asset over its useful life.

Total Depreciation Expense

The cumulative amount of an asset's cost that has been allocated as expense due to wear and tear over its useful life.