Question

Last year, Bad Tattoo Company had additions to retained earnings of $4,525 on sales of $94,825. The company had costs of $75,225, dividends of $2,800, and interest expense of $1,800. If the tax rate was 21 percent, what the depreciation expense? a) $7,879 b)$7,325 c)$13,492 d)$8.528 e)$6,928

Answer 1

To calculate the depreciation expense for Bad Tattoo Company, net income is first calculated and adjusted for taxes. Interest expense is added back since it's tax-deductible. This adjusted income is then subtracted from sales minus costs to determine the depreciation expense, approximately $8,528.

Step-by-step explanation:

Calculating the depreciation expense for Bad Tattoo Company involves using the given information to work through the income statement. The steps are:

1. Adding retained earnings and dividends to get net income: $4,525 + $2,800.
2. Adjusting net income for taxes by dividing by (1 - tax rate): ($4,525 + $2,800) / (1 - 0.21).
3. Adding interest expense (which is tax-deductible) to the after-tax income: Result of step 2 + $1,800.
4. Subtracting this result from sales minus costs gives us the depreciation: $94,825 - $75,225 - Result of step 3.

Following these steps:

1. $4,525 (retained earnings) + $2,800 (dividends) = $7,325.
2. $7,325 / (1 - 0.21) = $9,272.15 (net income before taxes).
3. $9,272.15 + $1,800 (interest expense) = $11,072.15.
4. $94,825 (sales) - $75,225 (costs) - $11,072.15 = $8,527.85.

Therefore, the depreciation expense is approximately $8,528 which corresponds to option (d).