Question

Last year, Johnson Mills had annual revenue of $37,800, cost of goods sold of $23,200, and administrative expenses of $6,300. The firm paid $700 in dividends and had a tax rate of 35 percent. The firm added $2,810 to retained earnings. The firm had no long-term debt. What was the depreciation expense?

Answer 1

Depreciation expense = 2,900

Step-by-step explanation:

Our goal would be to construct the formula where depreciation expense is and then increase deepth until find something we can work:

`$$Revenue - Expenses = Net Income`

Expanding expenses we find depreciation expense

`$$Revenue - COGS - Admin Expense - Dep Expense = Income Before Taxes`

Here we don't Know Income Before taxes so we have to work that first

`$$Income Before Taxes x (1-tax rate) = Net Income`

Here we don't Know Net Income taxes so we have to work that first

`$$Net Income - Dividends = change in Retained Earnings`

Here we got the other component of the formula, so it is possible to solve for net income and from there achieve the answer

Net income = 2,810 + 700 = 3,510

Income before taxes = 3,510/0.65 = 5,400

37,800 - 23,200 - 6,300 - dep expense = 5,400

dep expense = 2,900

`\ $Net income = 2,810 + 700 = 3,510 \\Income before taxes = 3,510/0.65 = 5,400\\37,800 - 23,200 - 6,300 - dep expense = 5,400\\dep expense = 2,900`