You have been given the following information for Sherry's Sandwich Corp.: Net sales = $300,000; Gross profit = $100,000; Addition to retained earnings = $30,000; Dividends paid to preferred and common stockholders = $8,500; Depreciation expense = $25,000. The firm's tax rate is 30 percent. What are the cost of goods sold and the interest expense for Sherry's Sandwich Corp.?
A) $20,000, and $200,000, respectively
B) $100,000, and $20,000, respectively
C) $200,000, and $20,000, respectively
D) $200,000, and $36,500, respectively

Question

Quizplus · Accepted Answer

Cost of Goods Sold (COGS) is calculated as Net Sales - Gross Profit = $300,000 - $100,000 = $200,000. To find the interest expense, we need to calculate the net income first. Start with the addition to retained earnings, which is after dividends, so add back dividends to get earnings after tax: $30,000 + $8,500 = $38,500. This is after tax, so to find before tax, divide by (1 - tax rate): $38,500 / (1 - 0.3) = $55,000. This is the earnings before taxes and interest. To find earnings before interest but after depreciation, add back depreciation: $55,000 + $25,000 = $80,000. Since Gross Profit - COGS - Depreciation = Earnings Before Interest and Taxes (EBIT), and we know Gross Profit is $100,000, we find that the only expenses not accounted for in EBIT are COGS ($200,000) and Depreciation ($25,000), which means the remaining difference to reach the calculated EBIT of $80,000 must be the interest expense. However, the calculation provided directly for interest expense is incorrect, leading to a misunderstanding in the explanation process. The correct approach involves understanding that the net income and the operations to calculate interest expense were not directly provided through the given steps, indicating a mistake in the explanation process.

You Have Been Given the Following Information for Sherry's Sandwich