Question

You are given the following information for Ted’s Dread Co.: sales = $76,600; costs = $55,300; addition to retained earnings = $6,300; dividends paid = $2,960; interest expense = $2,670; tax rate = 24 percent. Calculate the depreciation expense for the company.

Answer 1

Solution:

As per the information given in the question we have

Addition to Retained earnings = $ 6,300 ; Dividends paid = $ 2,960

We know that

Net Income after tax – Dividend paid = Addition to retained earnings

Applying the available information in the equation we have

Net Income after tax – $ 2,960 = $ 6,300

Net Income after tax = $ 6,300 + $ 2,960   = $ 9,260

We know that Net Income after tax is a calculated as follows:

Net Income after tax = [ Sales – Costs – Depreciation – Interest Expense ] * ( 1 – Tax rate )

As per the information available we have

Net Income after tax = $ 9,260 ;     Sales = $ 76,600 ; Costs = $ 55,300   ;

Interest Expense = $ 2,670 ;   Tax rate = 24 % = 0.24

Let the Depreciation expense be “ X “

Applying the above information in the Net Income equation we have

$ 9,260 = [ $ 76,600 - $ 55,300 - X - $ 2,670 ] * ( 1 - 0.24 )

$ 9,260 = [ $ 76,600 - $ 55,300 - X - $ 2,670 ] * 0.76

$ 9,260 = [ $ 18,630 - X ] * 0.76

$ 9,260 / 0.76 = [ $ 18,630 -X ]

$ 12184.2105 = $ 18,630 - X

X = $ 18,630 - $ 12,184.2105 = $ 6,445.7895

Thus the Depreciation expense = $ 6,445.7895

= $ 6,445.79 ( When rounded off to two decimal places )

= $ 6,446 ( When rounded off to the nearest whole number )