To find the depreciation expense, we need to first calculate the earnings before interest and taxes (EBIT) and net income.
First, we start with the formula for net income:
Net Income = Addition to retained earnings + Dividends paid
So, Net Income = $7,000 + $2,300 = $9,300
Next, we calculate the EBIT. We know that:
Net Income = EBIT - Interest Expense - Taxes
Rearranging this, we get:
EBIT = Net Income + Interest Expense + Taxes
We know the Net Income and Interest Expense, but we need to calculate the Taxes. Taxes are calculated as a percentage of the taxable income (EBIT - Interest Expense), so:
Taxes = Tax Rate * (EBIT - Interest Expense)
But we don't know the EBIT yet, so we need to solve the two equations simultaneously. Substituting the Taxes from the second equation into the first, we get:
EBIT = Net Income + Interest Expense + Tax Rate * (EBIT - Interest Expense)
Solving for EBIT, we get:
EBIT = (Net Income + Interest Expense) / (1 - Tax Rate)
So, EBIT = ($9,300 + $5,300) / (1 - 0.21) = $18,481.01
Finally, we calculate the Depreciation Expense. We know that:
EBIT = Sales - Costs - Depreciation Expense
So, rearranging for Depreciation Expense, we get:
Depreciation Expense = Sales - Costs - EBIT
Substituting in the known values, we get:
Depreciation Expense = $80,000 - $35,000 - $18,481.01 = $26,518.99
So, the depreciation expense for Eagle Pizza Co. is approximately $26,519.