Question

Late in the current year, Jolsen Company signed a four-year contract with an advertising agency. Under the contract, Jolsen must pay $375,000 annually for the agency's services. After Jolsen signed the contract, Congress enacted legislation disallowing any deduction for advertising expense for future tax years. Jolsen underestimated the after-tax cost of the contract because of:

Answer 1

Tax law uncertainty.

Step-by-step explanation:

The “Tax law uncertainty” is the correct answer because it can be seen in the question that Congress has disallowed the deductions for advertisement in the future tax years. Since the decisions that the government takes are confidential and only a few people are aware of the decisions before its formal announcement. So the same case is here, Jolsen had a contract of $375000 annually and it will estimate that after obtaining the tax deduction, the advertisement cost will be lower. But the changes in the tax laws result in underestimated after-tax cost by Jolsen.