Travels Sailing, Inc. sells sailing trips at the seashore. Travels has asked for

Question

Travels Sailing, Inc. sells sailing trips at the seashore. Travels has asked for help in calculating its earnings available to common stockholders. The firm generated revenues of $35,000 from its products. The operating costs to produce the products were $25,000. The financing activities of the firm resulted in an interest expense of $2,000, the repayment of a $2,000 loan, and the receipt of a new $8,000 loan. The firm paid $500 in preferred dividends. The firm received $1,000 in dividend income from its 10% investment in Cooke Enterprises inc. During the year, the firm sold 10 acres of undeveloped land for $8,000; the land was originally purchased twelve years ago for $5,000. Travels also sold a sailboat for $6,000. The boat, purchased six years ago for $25,000, had a book value of $8,000 at the time of the sale. The ordinary income tax rate is 40%, and the tax rate on capital gains is 20%. Travels has a $1,500 operating loss from previous years to carry forward to this year. Please calculate the earnings available to common stockholders for Travels Sailing, Inc.

Explanation / Answer

Solution:

Travels Sailing, Inc Particulars Amount Amount Amount Revenue $35,000.00 Less: Operating Costs $25,000.00 Operating Income $10,000.00 Add: Income from Other Sources: Dividend Income - Cooke Enterprises Inc $1,000.00 Less: Financing Expenses Interest Expense -$2,000.00 Loan Repayment -$2,000.00 Total Financing Expenses -$4,000.00 Earnings Before Tax $7,000.00 Less: Income Tax Payable Income Tax - 40% $2,800.00 (-) Operating Loss Carryforward $600.00 (-) Taxation on 70% dividend received $280.00 Net Income Tax Payable $1,920.00 Earnings After Tax $5,080.00 Less: Preferred Dividends $500.00 Add: Capital Gains Profit on Sale of Land $3,000.00 Loss on Sale of Sailboat -$2,000.00 Gross Capital Gain $1,000.00 (-) Capital Gain Tax - 20% $200.00 Net Capital Gain $800.00 Earnings Available to Common Stockholders $5,380.00

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