Question

Last year, Bad Tattoo Co. had additions to retained earnings of $4,780 on sales of $95,560. The company had costs of $75,720, dividends of $2,980, and interest expense of $2,040. If the tax rate was 34 percent, what the depreciation expense?

$6,439

$13,285

$7,390

$7,760

$6,042

Answer 1

$6,042

Working:

Depreciation is the difference between gross profit and operating profit (EBIT)
Step-1:Calculation of gross profit
	Sales				$       95,560
	Cost of goods sold				$     -75,720
	Gross Profit				$       19,840
Step-2:Calculation Operating profit(EBIT)
	Addition to retained earning					$    4,780
	dividend					$    2,980
	Net Income					$    7,760
	/(1-0.34)
	Profit before tax					$ 11,758
	Interest expense					$    2,040
	Earning before interest and taxes					$ 13,798
Step-3:Calculation of depreciation expense
	Gross Profit				$       19,840
	Earning before interest and taxes				$     -13,798
	Depreciation Expense				$         6,042