Given the following information for Ted's Dread Co., calculate the depreciation expense: sales = $68,500; costs = $51, 700; addition to retained earnings = $4,500; dividends paid = $2,420; interest expense=$2,130; tax rate=21 percent.

Depreciation Expense = $8,974

Explanation:

Ted's Dread Co.

Income Statement

Sales $68,500

Less: Costs $51,700

(4) Gross Profit $16,800

(5) Less: Depreciation Expense $8,974

(3) Income Before Interest and Taxes $7,826

Less: Interest Expense $2,130

(1) Income before Taxes $5,696

(2) Less: Tax $1,196

Net Income or Retained Earnings $4,500

1.

Income Before Taxes = Net Income / (1 - Effective Tax Rate)

Income Before Taxes = $4,500 / (1 - 0.21)

Income Before Taxes = $4,500 / 0.79

Income Before Taxes = $5,696

2.

Tax = Income Before Taxes x Effective Tax Rate

Tax = $5,696 x 21%

Tax = $1,196

3.

Income Before Interest and Taxes = Interest Expense + Income before Taxes

Income Before Interest and Taxes = $2,130 + $5,696

Income Before Interest and Taxes = $7,826

4.

Gross Profit = Sales - Costs

Gross Profit = $68,500 - $51,700

Gross Profit = $16,800

5.

Gross Profit - Depreciation Expense = Income Before Interest and Taxes

or

Depreciation Expense = Gross Profit - Income Before Interest and Taxes

Depreciation Expense = $16,800 - $7,826

Depreciation = $8,974