Question

QUESTION 1

1. You are given the following information for Mobility Research, Inc. (MRI).
   

   Sales	$200,000
   Costs	$105,000
   SG&A	$20,000
   Interest	$20,000
   Dividend paid	$8,000
   Retained Earnings Added	$20,000
   Total Assets	$85,000
   Equity	$45,000
   Tax Rate	35%

   
     
                   How much was the depreciation charge for MRI? (Hint: Prepare the income statement. You will have to work backwards to find the missing data.)

   	A.	$16,000
   	B.	$7,846
   	C.	$1,231
   	D.	$3,769
   	E.	$20,077
   	F.	$11,923

Answer 1

Solution:

As per the information given in the question we have

Addition to Retained earnings = $ 20,000 ; Dividend paid = $ 8,000

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 – $ 8,000 = $ 20,000

Net Income after tax = $ 8,000 + $ 20,000   = $ 28,000

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

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

As per the information available we have

Net Income after tax = $ 28,000 ;     Sales = $ 200,000 ; Costs = $ 105,000   ;

SG & A = $ 20,000 ;   Interest Expense = $ 20,000 ;   Tax rate = 35 % = 0.35

Let the Depreciation expense be “ X “

Applying the above information in the Net Income equation we have

$ 28,000 = [ $ 200,000 - $ 105,000 - $ 20,000 – X - $ 20,000 ] * ( 1 – 0.35 )

$ 28,000 = [ $ 200,000 - $ 105,000 - $ 20,000 – X - $ 20,000 ] * 0.65

$ 28,000 = [ $ 55,000 – X ] * 0.65

$ 28,000 / 0.65 = [ $ 55,000 – X ]

$ 43,076.923077 = $ 55,000 – X

X = $ 55,000 - $ 43,076.923077

= $ 11,923.076923

= $ 11,923 ( when rounded off to the nearest whole number )

Thus the Depreciation charge for MRI is  = $ 11,923

The solution is Option F. $ 11,923