Income Statement 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

The cost of goods sold 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 before taxes and interest. The net income after taxes is the addition to retained earnings plus dividends = $30,000 + $8,500 = $38,500. The net income before taxes is $38,500 / (1 - 0.30) = $55,000. The earnings before interest and taxes (EBIT) is net income before taxes plus interest expense. Assuming EBIT = Gross Profit - Depreciation = $100,000 - $25,000 = $75,000, the interest expense is $75,000 - $55,000 = $20,000.

Income Statement You Have Been Given the Following Information for Sherry's