Question

Given the following information for O'Hara Marine Co., calculate the depreciation expense: sales = $73,000; costs = $37,200; addition to retained earnings = $9,800; dividends paid = $2,620; interest expense = $2,950; tax rate = 24 percent. (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

Answer 1

Solution:

As per the information given in the question we have

Addition to Retained earnings = $ 9,800 ; Dividends paid = $ 2,620

We know that

Net Income after tax – Dividend paid = Addition to retained earnings

Applying the available information in the equation we have

Net Income after tax – $ 2,620 = $ 9,800

Net Income after tax = $ 9,800 + $ 2,620   = $ 12,420

We know that Net Income after tax is a calculated as follows :

Net Income after tax = [ Sales – Costs – Depreciation – Interest Expense ] * ( 1 – Tax rate )

As per the information available we have

Net Income after tax = $ 12,420 ;     Sales = $ 73,000 ; Costs = $ 37,200   ;

Interest Expense = $ 2,950 ;   Tax rate = 24 % = 0.24

Let the Depreciation expense be “ X “

Applying the above information in the Net Income equation we have

$ 12,420 = [ $ 73,000 - $ 37,200 – X - $ 2,950 ] * ( 1 – 0.24 )

$ 12,420 = [ $ 73,000 - $ 37,200 – X - $ 2,950 ] * 0.76

$ 12,420 = [ $ 32,850 – X ] * 0.76

$ 12,420 / 0.76 = [ $ 32,850 – X ]

$ 16,342.1053 = $ 32,850 – X

X = $ 32,850 - $ 16,342.1053 = $ 16,507.8947

= $ 16,508 ( when rounded off to the nearest whole number )

Thus the Depreciation expense = $ 16,508