Question

In: Finance

Last year, Bad Tattoo Co. had additions to retained earnings of $4,780 on sales of $95,560....

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

Solutions

Expert Solution

$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

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