I am having a problem figuring out this problem. I understand the concept of depreciation and it occurs on non cash items over a period of time. However, there are no cash items to depreciate in this problem.
Given the following information for O'Hara Marine Co, calculate the depreciation expense:
Sales=$43000; costs=$27500; addition to retained earnings=$5300; dividends paid=$1530; interest expense=$1900; tax rate=35 percent.
Is there anyone that can point me in the right direction? Thanks
Balance the books, you will be left with a depreciation expense entry.
Thank you Bob...Does that work the same for an income statement too?
Of course, I can help you with that! To calculate the depreciation expense for O'Hara Marine Co, we would need more information specifically related to depreciation, such as the value and estimated useful life of the assets being depreciated. However, based on the information you provided, it seems like there are no direct details regarding depreciation expenses in the given data.
However, we can calculate the depreciation indirectly by using the information provided.
To calculate the depreciation expense, we can utilize the income statement equation:
Sales - Costs - Depreciation Expense - Interest Expense - Tax Expense = Net Income
Given the following information:
Sales = $43,000
Costs = $27,500
Addition to Retained Earnings = $5,300
Dividends Paid = $1,530
Interest Expense = $1,900
Tax Rate = 35%
We can calculate the tax expense using the tax rate:
Tax Expense = Tax Rate * (Sales - Costs - Depreciation Expense - Interest Expense)
We know that the addition to retained earnings is equal to the net income minus dividends paid:
Net Income - Dividends Paid = Addition to Retained Earnings
Rearranging the equation to isolate Net Income:
Net Income = Addition to Retained Earnings + Dividends Paid
Substituting the values:
Net Income = $5,300 + $1,530 = $6,830
Now, we can calculate the tax expense:
Tax Expense = 0.35 * ($43,000 - $27,500 - Depreciation Expense - $1,900)
Substituting the calculated net income:
0.35 * ($43,000 - $27,500 - Depreciation Expense - $1,900) = $6,830
Simplifying the equation:
0.35 * ($13,600 - Depreciation Expense - $1,900) = $6,830
Now, we can solve for the depreciation expense:
0.35 * ($11,700 - Depreciation Expense) = $6,830
0.35 * $11,700 - 0.35 * Depreciation Expense = $6,830
$4,095 - 0.35 * Depreciation Expense = $6,830
-0.35 * Depreciation Expense = $6,830 - $4,095
-0.35 * Depreciation Expense = $2,735
Dividing both sides by -0.35:
Depreciation Expense = $2,735 / -0.35
Depreciation Expense ≈ $7,814.29
So, based on the given information, the depreciation expense for O'Hara Marine Co is approximately $7,814.29.
Please keep in mind that this is an indirect calculation of depreciation using the provided data. If you have access to additional financial information, it would be advisable to use that to obtain a more accurate depreciation expense figure.