You are given the following information for Calvani Pizza Co.: sales = $43,000; costs = $21,600; addition to retained earnings = $9,500; dividends paid = $900; interest expense = $4,000; tax rate = 35 percent. Calculate the depreciation expense.

You are given the following information for Calvani Pizza Co.: sales = $43,000; costs = $21,600; addition to retained earnings = $9,500; dividends paid = $900; interest expense = $4,000; tax rate = 35 percent. Calculate the depreciation expense. (Do not round intermediate calculations and round your final answer to nearest whole dollar amount.)

 

Depreciation expense

$

Explanation:

The solution to this question works the income statement backwards. Starting at the bottom:

Net income = Dividends + Addition to retained earnings = $900 + 9,500 = $10,400

Now, looking at the income statement:

EBT − EBT × Tax rate = Net income

Recognize that EBT × Tax rate is simply the calculation for taxes. Solving this for EBT yields:

EBT = NI / (1 − Tax rate) = $10,400 / (1 − 0.35) = $16,000

Now you can calculate:

EBIT = EBT + Interest = $16,000 + 4,000 = $20,000

The last step is to use:

EBIT = Sales − Costs − Depreciation

$20,000 = $43,000 − 21,600 − Depreciation

Solving for depreciation, we find that depreciation = $1,400