You are given the following information for Sookie’s Cookies Co.: sales = $52,100; costs = $38,700;

You are given the following information for Sookie’s Cookies Co.: sales = $52,100; costs = $38,700; addition to retained earnings = $2,975; dividends paid = $980; interest expense = $1,470; tax rate = 30 percent.

 

Required:

Calculate the depreciation expense. (Do not include the dollar sign ($).)

 

Depreciation expense

$

Explanation:

Here we need to work the income statement backward. Starting with net income, we know that net income is:

 

Net income = Dividends + Addition to retained earnings

Net income = $980 + 2,975

Net income = $3,955

Net income is also the taxable income, minus the taxable income times the tax rate, or:

Net income = Taxable income – (Taxable income)(Tax rate)

Net income = Taxable income(1 – Tax rate)

We can rearrange this equation and solve for the taxable income as:

Taxable income = Net income / (1 – Tax rate)

Taxable income = $3,955 / (1 – 0.30)

Taxable income = $5,650

    

EBIT minus interest equals taxable income, so rearranging this relationship, we find:

 

EBIT = Taxable income + Interest

EBIT = $5,650 + 1,470

EBIT = $7,120

Now that we have the EBIT, we know that sales minus costs minus depreciation equals EBIT. Solving this equation for EBIT, we find:

EBIT = Sales – Costs – Depreciation

$7,120 = $52,100 – 38,700 – Depreciation

Depreciation = $6,280