Question

You are given the following information for Bowie Pizza Co.: Sales = $64,000; Costs = $30,700; Addition to retained earnings = $5,700; Dividends paid = $1,980; Interest expense = $4,400; Tax rate = 22 percent. Calculate the depreciation expense. (Do not round intermediate calculations and round your answer to the nearest dollar.)

Answer 1

To find the depreciation expense, calculate the net income before taxes, determine taxes, net income after taxes, EBIT, and then subtract costs from EBIT. Round the final number to the nearest dollar for the depreciation expense.

Step-by-step explanation:

To calculate the depreciation expense for Bowie Pizza Co., we need to use the information provided, along with the knowledge of income statement relations and the retained earnings formula.

The net income can be found by subtracting all expenses (including taxes and interest expense) from the sales revenue. Retained earnings increase by the net income minus dividends paid. Therefore, if we know the addition to retained earnings, the dividends paid, and the other factors, we can work backwards to find the depreciation.

Let's calculate it step by step:

1. Compute the net income before taxes by adding interest expense to the addition to retained earnings and dividends paid.
2. Calculate taxes by applying the tax rate to the income before taxes.
3. Determine the net income after taxes by subtracting the taxes from the income before taxes.
4. Find the EBIT (Earnings Before Interest and Taxes) by adding back interest expense to the net income after taxes.
5. Last, identify the depreciation expense by subtracting the costs (without the depreciation) from the EBIT.

Here is the mathematical representation:

• Net Income Before Taxes = Addition to Retained Earnings + Dividends Paid + Interest Expense
• Taxes = Net Income Before Taxes * Tax Rate
• Net Income After Taxes = Net Income Before Taxes - Taxes
• EBIT = Net Income After Taxes + Interest Expense
• Depreciation Expense = EBIT - Costs

After performing these calculations, round up the depreciation expense to the nearest dollar to obtain your final answer.

Answer 2

$18554

Step-by-step explanation:

The formula for addition to retained earnings can be used to determine the amount of depreciation expense as shown below:

addition to retained earnings=sales-costs-depreciation expense-interest expense-tax paid-dividends

addition to retained earnings=net income-dividends

5700=net income-1980

net income=5700+1980=7680

if tax 22%,net income is 1-22%=0.78

profit before tax=7680 /0.78= 9,846.15

tax = 9,846.15*22%= 2,166.15

using the long formula,we have depreciation expense

5700=64000-30700-depreciation expense-4400-2666.15-1980

depreciation expense=64000-30700-4400-2666.15-1980-5700

depreciatio expense=$18553.85