After one year, if Apple pays interest on a loan and records depreciation, what is the effect on net income considering a 10% depreciation?

After one year, if Apple pays interest on a loan and records depreciation, what is the effect on net income considering a 10% depreciation?

• A. Net income increases by $12
• B. Net income falls by $12
• C. Net income remains unchanged
• D. Net income falls by $10

Answer: (B)

When Apple pays interest on a loan and records depreciation, both of these actions will reduce net income. Depreciation represents a non-cash expense that reduces taxable income. If the rate of depreciation is 10%, this means that the value of the asset depreciates by this percentage due to wear and tear, or obsolescence over the year. In this scenario, let's say the original value of the asset is $100. A 10% depreciation would result in a $10 expense recorded on the financial statements. Additionally, the interest expense from the loan will also lower net income. If we assume the interest paid is $2, when you total these expenses, the combined effect on net income would indeed reduce it by $12 ($10 from depreciation and $2 from interest). This decrease is a direct consequence of recognizing these expenses, manifesting as a reduction in earnings. Therefore, net income falls by $12, which aligns with the choice that was indicated as correct.

When Apple pays interest on a loan and records depreciation, both of these actions will reduce net income. Depreciation represents a non-cash expense that reduces taxable income. If the rate of depreciation is 10%, this means that the value of the asset depreciates by this percentage due to wear and tear, or obsolescence over the year.

In this scenario, let's say the original value of the asset is $100. A 10% depreciation would result in a $10 expense recorded on the financial statements. Additionally, the interest expense from the loan will also lower net income. If we assume the interest paid is $2, when you total these expenses, the combined effect on net income would indeed reduce it by $12 ($10 from depreciation and $2 from interest).

This decrease is a direct consequence of recognizing these expenses, manifesting as a reduction in earnings. Therefore, net income falls by $12, which aligns with the choice that was indicated as correct.