3.5
a. Income Statement for Brandywine Homecare for the Year Ended December 31, 2015:
Revenues: $12,000,000
Expenses:
Expenses other than depreciation: 75% of Revenues = 0.75 x $12,000,000 = $9,000,000
Depreciation Expense: $1,500,000
Total Expenses: $9,000,000 + $1,500,000 = $10,500,000
Net Income: Revenues – Total Expenses = $12,000,000 – $10,500,000 = $1,500,000
b. Net Income: $1,500,000
Total Profit Margin: Net Income/Revenues = $1,500,000/$12,000,000 = 0.125 or 12.5%
Cash Flow: Net Income + Depreciation Expense = $1,500,000 + $1,500,000 = $3,000,000

c. If Brandywine Homecare doubled its depreciation expense:
New Depreciation Expense: $1,500,000 x 2 = $3,000,000

Net Income: Revenues – Total Expenses = $12,000,000 – ($9,000,000 + $3,000,000) = $0
Total Profit Margin: Net Income/Revenues = $0/$12,000,000 = 0%
Cash Flow: Net Income + Depreciation Expense = $0 + $3,000,000 = $3,000,000
d. If Brandywine Homecare halved its depreciation expense:
New Depreciation Expense: $1,500,000 / 2 = $750,000
Net Income: Revenues – Total Expenses = $12,000,000 – ($9,000,000 + $750,000) = $2,250,000
Total Profit Margin: Net Income/Revenues = $2,250,000/$12,000,000 = 0.1875 or 18.75%
Cash Flow: Net Income + Depreciation Expense = $2,250,000 + $750,000 = $3,000,000

3.8
a. Annual Depreciation Expense using straight-line method:
Total Cost of the new facility – Salvage Value / Useful Life
= ($18,000,000 – $1,500,000) / 20 = $825,000
b. Depreciation Shield (Tax Savings):
Depreciation Expense x Tax Rate = $825,000 x 40% = $330,000
c. The depreciation shield results in noncash savings for Bright Horizons. It reduces the taxable income and, consequently, the income tax expense, which results in savings in income taxes. However, it does not involve any actual cash outflow or inflow. It is a noncash expense that reduces the company’s taxable income, resulting in lower income tax payments.

3.9
a. Revenue Section of Integrated Physicians & Associates’ Income Statement for the Year Ended December 31, 2015:
Net Patient Service Revenue: $2,000,000
Contractual Discounts and Allowances: $250,000
Uncollected Patient Service Revenue: $50,000
Total Revenues: $2,000,000 – $250,000 + $50,000 = $1,800,000
b. Effect of the misstatement on Integrated Physicians & Associates’ 2015 reported:
Net Patient Service Revenue: Understated by $50,000
Total Expenses, including Income Tax Expense: Not affected