[Vitale]

Hello All!

I will be grateful for your help on this easy topic which I can’t crack for some reason.

Here is the example which shows what would the amount of net income be is the company

expenses capitalized costs (deferred acquisition cost) in this example). My question is on tax

adjustment: why do I have to *add* tax on the difference between added back full amortization and

expense of deferred acquisition cost subtracted from the net income. I don’t see how the math works here.

To get the amount of net income I had to subtract the amortization cost (12) from, say, gross earnings;

and then subtract tax. Thus 5 already accounts for tax on 12.

Net Income if expense immediately

Net Income 5

Amortization of Deferred subscriber acquisition costs 12

Deferred subscriber acquisition costs (20)

Tax adjustment (12 – 20) * 0.4 3.2

Net Income if expense immediately 0.2

Assume that there were no other costs than amortization expense initially. Then if net income is 5,

earnings before amortization and tax would be 5 = (x – 12) x 0.6, x = 20.33

Earnings 20.33

Amortization 12

Earnings after amortization 8.33

Tax 40% 3.332

Net income 4.998 (which is 5, rounded)

Thank you!