Question

INCOME STATEMENT Patterson Brothers recently reported an EBITDA of $7.5 million andnet income of $2.1 million. It had $2.0 million of interest expense, and its corporate tax ratewas 30%. What was its charge for depreciation and amortization

Answer 1

The charge for depreciation and amortization is $2.5 million, calculated by subtracting EBIT (Earnings Before Interest and Taxes) from EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Step-by-step explanation:

To calculate the charge for depreciation and amortization, we need to work backwards from the net income. Given that Patterson Brothers reported an EBITDA of $7.5 million, net income of $2.1 million, interest expense of $2.0 million, and a corporate tax rate of 30%, we can use the following steps:

1. Identify EBT (Earnings Before Taxes), by adding interest expense back to net income: EBT = Net Income / (1 - Tax Rate).
2. Calculate taxes paid by multiplying EBT by the tax rate.
3. Determine EBIT (Earnings Before Interest and Taxes) by adding interest expense to EBT.
4. Finally, calculate the charge for depreciation and amortization by subtracting EBIT from EBITDA.

Following these steps:

1. EBT = $2.1 million / (1 - 0.3) = $3 million.
2. Taxes = $3 million × 0.3 = $0.9 million.
3. EBIT = EBT + Interest Expense = $3 million + $2.0 million = $5 million.
4. Depreciation and Amortization = EBITDA - EBIT = $7.5 million - $5 million = $2.5 million.

Answer 2

$ 1.75 million

Step-by-step explanation:

EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization. Net Income is Earnings after Interest, Tax, Depreciation and Amortization.

So to find charge for depreciation and amortization we need to reconcile the EBITDA to the Net Income and find the missing figures,

Reconciliation of EBITDA to the Net Income

EBITDA $7.5 million

Less Net income ($2.1 million)

Interest, Tax, Depreciation and Amortization $5.4 million

Less Interest expense ($2.0 million)

Less Corporate tax ($7.5 million - $2.0 million) × 30% ($1.65 million)

Charge for depreciation and amortization $ 1.75 million