A firm has net income of $2,610 and a tax rate of 33 percent. The revenue is $20,400, costs are 78 percent of sales, and interest expense is $100. What is the depreciation expense for the year?
To find the depreciation expense for the year, we first need to calculate the firm's taxable income. Here's how you can do it:
1. Calculate the earnings before interest and taxes (EBIT):
EBIT = Revenue - Costs
EBIT = $20,400 - (78% * $20,400)
EBIT = $20,400 - $15,912
EBIT = $4,488
2. Calculate the taxable income:
Taxable Income = EBIT - Interest Expense
Taxable Income = $4,488 - $100
Taxable Income = $4,388
3. Calculate the tax paid:
Tax Paid = Taxable Income * Tax Rate
Tax Paid = $4,388 * 33%
Tax Paid = $1,448.04
4. Calculate the net income before taxes (NI):
NI = Net Income + Tax Paid
NI = $2,610 + $1,448.04
NI = $4,058.04
5. Calculate the depreciation expense:
Depreciation Expense = NI - EBIT
Depreciation Expense = $4,058.04 - $4,488
Depreciation Expense = -$429.96
The depreciation expense for the year is -$429.96. Note that it is negative, which means the firm has had an accounting gain from depreciation.