TT in 2010 had $11,500 of sales, $7,125 of operating, and $1,100 of depreciation

Question

TT in 2010 had $11,500 of sales, $7,125 of operating, and $1,100 of depreciation. TT has $3,500 of bonds that carry a 5.75% interest rate with an income tax rate of 40%. Everything should remain the same in 2011 except for depreciation, which is expected to increase by $950.

a. Set up the table that shows how everything is derived all the way down to net income for 2010 and 2011. Also provide a column that shows the changes.

b. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes. (2.65)

Explanation / Answer

In this problem, TT is operating its business. Major revenue statement informations are available. Likely changes in the year 2011 is also stated. You have to prepare rvenue statement to ascertain et revenues. It is shown below:

Answer:

(a) In 2010 and 2011, net income are $3,275 and $2,325. It is before interest and tax.

(b) after considering tax, it is $1,844.25 in 2010 and $1,274.25 in 2011. So due to depreciation, it has decreased in 2011 by $570. It is 60% of increase in depreciation. [($950)x(1-0.4)=$570]

Details 2010 2011 1. Sales $11,500 $11,500 2. operating cost $7,125 $7,125 3. Depreciation $1,100 $2,050 4. Net income before interest and tax [1-2-3] $3,275 $2,325 5. interest on Bond [$3,500x5.75%] $201.25 $201.25 6. Net revenue before tsx [4-5] $3,073.75 $2,123.75 7. Tax [40% on 6] $1,229.5 $849.50 8. Net revenue after tax [6-7] $1,844.25 $1,274.25 9. Change in net revenue -$570

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