You have been given the following information for Kaye's Krumpet Corp.: Net sales = $150,000; Gross profit = $100,000; Addition to retained earnings = $20,000; Dividends paid to preferred and common stockholders = $8,000; Depreciation expense = $50,000. The firm's tax rate is 30 percent. What are the cost of goods sold and the interest expense for Kaye's Krumpet Corp.?
A) $10,000, and $50,000, respectively
B) $50,000, and $10,000, respectively
C) $50,000, and $22,000, respectively
D) $62,000, and $10,000, respectively

Question

Quizplus · Accepted Answer

The cost of goods sold is calculated as Net Sales - Gross Profit, which is $150,000 - $100,000 = $50,000. To find the interest expense, we calculate the net income before taxes and interest. Starting with the addition to retained earnings ($20,000) and dividends ($8,000), the net income is $28,000. The net income before taxes is $28,000 / (1 - 0.30) = $40,000. Adding back depreciation ($50,000), we get $90,000. Since Gross Profit - COGS - Depreciation - Interest = Net Income before taxes, $100,000 - $50,000 - $50,000 - Interest = $40,000, solving gives Interest = $10,000.

You Have Been Given the Following Information for Kaye's Krumpet