Question

Builtrite had sales of $700,000 and COGS of $290,000. In addition, operating expenses were calculated at 25% of sales. Interest expense was based on $100,000 of bonds outstanding with an interest rate of 7%. Builtrite also received dividends of $40,000 and paid out common stock dividends of $25,000 to its stockholders. A long-term capital gain of $55,000 was realized during the year along with a capital loss of $45,000 Based on the above information, answer the following 4 questions: 1. What is Builtrite’s taxable income? $278,000 $242,000 $257,000 $250,000 2. Based on their taxable income, what is Builtrite’s tax liability? $80,750 $83,480 $91,670 $77,630 3. Builtrite has $7,000 in interest expense, how much does this interest expense cost Builtrite after taxes? $0 $2,730 $4,270 $7,000 4. If Builtrite had experienced a long-term capital loss of $70,000 (instead of the $45,000 long-term capital loss stated in the problem), and still had the $55,000 long-term capital gain stated in the problem, which of the following is correct: taxable income would decrease by $5,000 taxable income would decrease by $15,000 taxable income would decrease by $10,000 taxable income would not change 5. Last year Builtrite had retained earnings of $120,000. This year, Builtrite had true net profits after taxes of $75,000 which includes common stock dividends received of $20,000. Builtrite also paid a preferred dividend of $15,000. What is Builtrite’s new level of retained earnings?    $190,000 $200,000 $180,000 $210,000

Answer 1

Question 1:

The taxable income is calculated as shown in the below table:

Sales	700000	Given
Cost of Goods Sold	-290000	Given
Gross Profit	410000	Sales - Cost of Goods sold
Operating expenses	-175000	25% of sales
EBIT	235000	Gross profit - Operating expenses
Interest expense	-7000	7% of 100,000
Dividends received	40000	Given
Net Long term Gain	10000	Capital gain of 55000 - Capital loss of 45000
Taxable Income	278,000

Therefore answer is $278,000 Option (a)

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