Papa Roach Exterminators, Inc., has sales of $729,000, costs of $315,000, deprec

Question

Papa Roach Exterminators, Inc., has sales of $729,000, costs of $315,000, depreciation expense of $50,000, interest expense of $28,000, and a tax rate of 35 percent. If the firm paid out $71,000 in cash dividends. What is the addition to retained earnings?

Papa Roach Exterminators, Inc., has sales of $729,000, costs of $315,000, depreciation expense of $50,000, interest expense of $28,000, and a tax rate of 35 percent. If the firm paid out $71,000 in cash dividends. What is the addition to retained earnings?

Explanation / Answer

Retained Earnings are the portion of a business’s profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business.

Retained Earnings = Beginning Period RE + Net Income/Loss – Dividends to shareholders

Table showing computation of amount added to retained earnings Particulars Amount (in $) Sales 729,000 Less : Costs (315,000) Less : Depreciation (50,000) Earnings before Interest & Tax (EBIT) 364,000 Less : Interest (28,000) Earnings before Tax (EBT) 336,000 Less : Tax (336,000 * 35%) (117,600) Earnings availabe for shareholders 218,400 Less : Dividend (71,000) Amount added to Retained Earnings 147,400

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