Question

Papa Roach Exterminators, Inc., has sales of $709,000, costs of $215,000, depreciation expense of $40,000, interest expense of $27,000, and a tax rate of 40 percent. If the firm paid out $79,000 in cash dividends. What is the addition to retained earnings? Multiple Choice $%244,200 $204,200 $159,480 $217,200 ew s11.20

Answer 1

Accumulation of net income after subtracting the dividend amount is the retained earnings.

Therefore, net income should be calculated first.

Net income = (Sales – Costs – Depreciation – Interest) × (1 – tax rate)

                        = (709,000 – 215,000 – 40,000 – 27,000) × (1 – 0.40)

                        = $427,000 × 0.60

                        = $256,200

Net income after dividend = Net income – Dividend

                                                = 256,200 – 79,000

                                                = $177,200

Answer: 5^th option