Addition to retained earnings: Tangent, Ltd., has revenues of $4,375,233 and costs of $2,467,321, and pays a tax rate of 34 per cent. If the company pays out 60 per cent of its earnings as dividends every year, what is the amount of retained earnings?

Question

Quizplus · Accepted Answer

First, we need to calculate the net income of Tangent, Ltd.:
Revenues - Costs = $4,375,233 - $2,467,321 = $1,907,912
Tax rate = 34%, so the tax expense is:
$1,907,912 x 34% = $648,144.48
Net income = $1,907,912 - $648,144.48 = $1,259,767.52
The company pays out 60% of its earnings as dividends, so the amount of dividends paid is:
$1,259,767.52 x 60% = $755,860.51
Retained earnings = Net income - Dividends paid
Retained earnings = $1,259,767.52 - $755,860.51 = $503,907.01, which is closest to option C.

Addition to Retained Earnings: Tangent, Ltd