Question

Little Company is a subsidiary of Big Company. Big is located in Jurisdiction A which levies a 20% income tax. Little is located in a Jurisdiction B which levies a 30% income tax. Both companies are considering a $20,000 expenditure. The after-tax cost of the expenditure is $for Big Company and $ for Little Company.

Answer 1

The after-tax cost of a $20,000 expenditure for Big Company in Jurisdiction A is $16,000, and for Little Company in Jurisdiction B, it is $14,000. These calculations are based on their respective income tax rates of 20% and 30%.

Step-by-step explanation:

The student has asked about the after-tax cost of a $20,000 expenditure for two subsidiaries located in different jurisdictions with different tax rates. To calculate the after-tax cost for Big Company, which is located in Jurisdiction A with a 20% income tax, we take the initial expenditure and subtract the tax savings. This can be calculated as $20,000 - ($20,000 × 0.20) = $20,000 - $4,000 = $16,000.

For Little Company in Jurisdiction B with a 30% income tax, the calculation is similar: $20,000 - ($20,000 × 0.30) = $20,000 - $6,000 = $14,000. Consequently, the after-tax cost of the expenditure is $16,000 for Big Company and $14,000 for Little Company.

Understanding the impact of different corporate income tax rates on company expenditures is crucial for financial planning and decision-making within corporations. Such considerations take into account the variance in taxation between different jurisdictions, as illustrated by the differences between Big and Little Company.