Calculate retention ratio given the following information: cash dividends paid = $6,000; sales = $100,000; cost of goods sold = $45,000; selling and administrative expenses = $25,000; interest
Expense = $6,000; tax rate = 30%.

Question

Quizplus · Accepted Answer

First, we need to calculate net income:
Sales - Cost of Goods Sold - Selling and Administrative Expenses - Interest Expense = $100,000 - $45,000 - $25,000 - $6,000 = $24,000

Next, we need to calculate the amount of earnings retained:
Net Income x (1 - Tax Rate) = $24,000 x (1 - 0.3) = $16,800

Finally, we can calculate the retention ratio:
Retention Ratio = (Net Income - Dividends Paid) / Net Income = ($16,800 - $6,000) / $16,800 = 0.6429, or 64.29%

Therefore, the best choice is A) 64.29%.

Calculate Retention Ratio Given the Following Information: Cash Dividends Paid