To arrive at this answer, I divided the income tax expense ($950 million) by the income earned before taxes ($1568 million). Theoretically if there was a $2000 increase in income, there would be an increase in the taxable income leading to greater tax liabilities for Amazon. This makes sense since “higher rates generally apply to higher portions of a company’s taxable income” (Turbotax, n.d.). Tax expense= effective rate x taxable income. Thus, tax expense would increase due to the increased income. To illustrate, 60.59% (the effective tax rate) x taxable income of $3568 million ($1568 previous income before tax + $2000 income increase) would result in a $2161.85 million dollar tax expense versus the $950.05 million dollar tax before the additional $2000 income was included. “This higher tax obligation on Amazon would cause current tax expense to increase which would reduce the net income on the income statement while reducing retained earnings on the balance sheet” (Investopedia, n.d.). The cash account would decrease as well due to the fact that Amazon would be earning less profits. If the expense is paid in the same period, the cash balance on Amazon’s balance sheet would decline to represent the expense paid decreasing retained earnings. However, if Amazon doesn’t pay the tax expense right away, the deferred liabilities account would increase as the expense would be accrued and paid at a later
To arrive at this answer, I divided the income tax expense ($950 million) by the income earned before taxes ($1568 million). Theoretically if there was a $2000 increase in income, there would be an increase in the taxable income leading to greater tax liabilities for Amazon. This makes sense since “higher rates generally apply to higher portions of a company’s taxable income” (Turbotax, n.d.). Tax expense= effective rate x taxable income. Thus, tax expense would increase due to the increased income. To illustrate, 60.59% (the effective tax rate) x taxable income of $3568 million ($1568 previous income before tax + $2000 income increase) would result in a $2161.85 million dollar tax expense versus the $950.05 million dollar tax before the additional $2000 income was included. “This higher tax obligation on Amazon would cause current tax expense to increase which would reduce the net income on the income statement while reducing retained earnings on the balance sheet” (Investopedia, n.d.). The cash account would decrease as well due to the fact that Amazon would be earning less profits. If the expense is paid in the same period, the cash balance on Amazon’s balance sheet would decline to represent the expense paid decreasing retained earnings. However, if Amazon doesn’t pay the tax expense right away, the deferred liabilities account would increase as the expense would be accrued and paid at a later