Question

You have been given the following information for PattyCake’s Athletic Wear Corp. for the year 2018:

1. Net sales = $39,050,000.

2. Cost of goods sold = $22,250,000.

3. Other operating expenses = $6,700,000.

4. Addition to retained earnings = $1,213,500.

5. Dividends paid to preferred and common stockholders = $1,950,500.

6. Interest expense = $1,865,000.

7. The firm’s tax rate is 30 percent.

In 2019:

8. Net sales are expected to increase by $10.05 million.

9. Cost of goods sold is expected to be 60 percent of net sales.

10. Depreciation and other operating expenses are expected to be the same as in 2018.

11. Interest expense is expected to be $2,140,000.

12. The tax rate is expected to be 30 percent of EBT.

13. Dividends paid to preferred and common stockholders will not change.

Calculate the addition to retained earnings expected in 2019

Answer 1

Data for 2018 :

Net sales = $39,050,000

Cost of goods sold = $22,250,000

Other operating expenses = $6,700,000

Addition to retained earnings = $1,213,500

Dividends paid to preferred and common stockholders = $1,950,500

Interest expense = $1,865,000

We have to compute depreciation(D) for 2018 as it is missing.

we know that EBIT (1-tax rate) = Profit available for Distribution to shareholders;

i.e [ Sales - COGS - Operating Expenses - Depreciation - Interest ] * (1-tax rate) = Profit available for Distribution to shareholders

Profit available for Distribution to shareholders = Addition to retained earnings + Dividends paid

[ $39,050,000 - $22,250,000 - $6,700,000 - D - $1,865,000 ] (1 - 0.30) = $1,213,500 + $1,950,500

=> [ 8,235,000‬ - D ] (0.7) = 3,163,500‬

=> 5,764,500‬ - 0.7D = 3,163,500 => D = $3,715,714

Depreciation for 2018 = $3,715,714

Computation of addition to retained earnings expected in 2019 :

Net sales after an increase by $10.05 million => $39,050,000 + $10,050,000 => $49,100,000‬

Cost of goods sold = 60% of net sales => 60% of 49,100,000‬ => $29,460,000

Depreciation (same as 2018) => $3,715,714

Other operating expenses (same as 2018) => $6,700,000

Interest expense = $2,140,000

Earnings before Taxes = [ Sales - COGS - Operating Expenses - Depreciation - Interest ]

= [$49,100,000‬ - $29,460,000 - $3,715,714 - $6,700,000 - $2,140,000]

= $7,084,286

Profit available for Distribution to shareholders = EBIT (1-tax rate)

= $7,084,286 (1-0.3) => $4,959,000

Addition to Retained Earnings => Profit available for Distribution to shareholders - Dividends paid

=> $4,959,000 - $1,950,500​​​​​​​ => $3,008,500

PattyCake’s Athletic Wear Corp.
Income Statement
Revenue		2018	2019
	Net Sales	39,050,000	49,100,000
	Revenue	39,050,000	49,100,000
Cost of Goods Sold
	Cost of Goods Sold	22,250,000	29,460,000
	Cost of Goods Sold	22,250,000	29,460,000
	Gross Profit (Loss)	16,800,000	19,640,000
Expenses
	Depreciation	3,715,714	3,715,714
	Other Operating expenses	6,700,000	6,700,000
	Total Operating Expenses	10,415,714	10,415,714
Operating Income (Loss)		6,384,286	9,224,286
	Non-operating revenues, expenses, gains, losses	-	-
	(Less interest expense)	(1,865,000)	(2,140,000)
	Income Before Taxes	4,519,286	7,084,286
	(Less income tax expense)	(1,355,786)	(2,125,286)
Net Income From Continuing Operations		3,163,500	4,959,000