Question

The Centennial Chemical Corporation announced that, for the period ending March 31, 2017, it had earned income after taxes of $2,768,028.25 on revenues of $13,144,680. The company's costs (excluding depreciation and amortization) amounted to 61 percent of sales, and it had interest expenses of $392,168. What is the firm's depreciation and amortization expense if its average tax rate is 34 percent?

Please be as detail as positive on how the calculation is done i really want to learn.

Answer 1

Solution :

The formula for calculating the Net Income after taxes is

Income after taxes = ( Revenues/Sales – Costs – Depreciation and amortization – Interest expense ) * ( 1 – tax rate )

As per the information given in the question we have

Revenues / Sales = $ 13,144,680   ; Income after taxes = $2,768,028.25

Costs = 61 % of sales = $ 13,144,680 * 61 % = $ 8,018,254.80

Interest expenses = $392,168   ; Tax rate = 34 %

Depreciation and amortization = To find

Let the Depreciation and amortization be “ x “

Applying the above information in the formula for Income after taxes we have

$2,768,028.25 = ( $ 13,144,680 - $ 8,018,254.80 – x - $392,168 ) * ( 1 – 0.34 )

$2,768,028.25 = ( $ 13,144,680 - $ 8,018,254.80 – x - $392,168 ) * 0.66

$2,768,028.25 / 0.66 = ( $ 13,144,680 - $ 8,018,254.80 – x - $392,168 )

$ 4,193,982.1970 = $ 4,734,257.20 – x

x = $ 4,734,257.20 - $ 4,193,982.1970

x = $ 540,275.0030

x= $ 540,275 ( when rounded off to the nearest whole number )

Thus the firm’s Depreciation and amortization expense = $ 540,275