Suppose the firm in paid out (sales of $586,000, costs of $247,000, depreciation expense of $43,000, interest expense of $32,000, and a tax rate of 35 percent) $73,000 in cash dividends. What is the addition to retained earnings?
bob
To find the addition to retained earnings, we need to calculate the net income first. Net income is the difference between total revenues and total expenses, before taxes and dividends.
The calculation for net income is as follows:
Net Income = (Sales - Costs) - (Depreciation Expense + Interest Expense)
Given the information, we can substitute the values:
Net Income = ($586,000 - $247,000) - ($43,000 + $32,000)
Net Income = $339,000 - $75,000
Net Income = $264,000
Next, we need to calculate the dividends paid out after taxes. Dividends paid out after taxes can be found by subtracting the tax amount from the cash dividends:
Dividends Paid Out After Taxes = Cash Dividends - (Net Income * Tax Rate)
Dividends Paid Out After Taxes = $73,000 - ($264,000 * 0.35)
Dividends Paid Out After Taxes = $73,000 - $92,400
Dividends Paid Out After Taxes = -$19,400
In this case, the dividends paid out exceed the net income after taxes. Therefore, the firm would have a negative addition to retained earnings.