California Retailing Inc.has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000.The firm's interest expense is $250,000,and the corporate tax rate is 40%.The firm paid dividends to preferred stockholders of $40,000,and the firm distributed $60,000 in dividend payments to common stockholders.What is California Retailing's "Addition to Retained Earnings"?

Question

Quizplus · Accepted Answer

To calculate the "Addition to Retained Earnings," we start with the net income calculation: Sales - Cost of Goods Sold - Operating Expenses - Interest Expense = Earnings Before Tax. Then, we subtract taxes (Earnings Before Tax * Tax Rate) to get Net Income. Finally, we subtract the dividends paid to both preferred and common stockholders from the Net Income to find the Addition to Retained Earnings. Calculation: $4,000,000 - $2,500,000 - $600,000 - $250,000 = $650,000 (Earnings Before Tax). Taxes = $650,000 * 40% = $260,000. Net Income = $650,000 - $260,000 = $390,000. Addition to Retained Earnings = $390,000 - $40,000 (Preferred Dividends) - $60,000 (Common Dividends) = $290,000.