One of my favorite companies, Caskets-R-Us, famous for its line of \"underground

Question

One of my favorite companies, Caskets-R-Us, famous for its line of "underground condos" had sales of $1,000,000. The cost of the caskets (they import them from China) was $220,000 and the labor costs (they arrive in kit form) was $400,000. Sometime after 1 July, they purchased a machine for $150,000 to make simulated brass handles. The equipment has a MACRS life expectancy of 5 years They received a $30,000 dividend check from stock the company owns in Apple, Inc and $5,000 in interest from CD's they own. The company did not pay any common dividends but did pay $10,000 in preferred stock dividends for the current year and $20,000 in preferred dividends from the previous two years (the preferred stock is cummulative). Lastly, they sold $100,000 in bonds five years ago (20 year maturity) that carried an 8% coupon. Given this information: a. what was the depreciation expense for this year and what will it be next year, and b. what is their net income for this year?

Explanation / Answer

1st year depreciation percentage for 5 yr MACR = 20 percent

But equipment is bought on 1st july. Therefore applicable depreciation for current year = 10 %

Depreciation expense = 10% of 150000 = $15000

b)

Sales 1000000 -COGS -220000 -Labour cost -400000 -Depreciation expense -15000 +Dividend income 30000 +CD Interest 5000 -Interest expense =Par value of bond*coupon rate -8000 -Preferred dividends current year -10000 =Net income 382000

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