Question

A corporation had year end 2017 and 2018 retained earnings balances of $380,000 and $450,000, respectively. In 2018 the firm paid $110,000 in dividends. If the firm is subject to a 40% tax rate, how much is the Net profits before taxes in 2018?

Select one:

a. $600,000

b. $400,000

c. $300,000

d. $500,000

Answer 1

Retained earnings at the end is calculated as follows,

Retained earnings at the end =Retained earnings at the beginning+Net income after tax-Dividends

From the above equation we can find missing value i.e., Net Income after tax as follows,

Net income after tax =Retained earnings at the end+ Dividends- Retained earnings at the beginning

Net income after tax =4,50,000+1,10,000-3,80,000

Net income after tax=1,80,000

We can calculate Net income after tax as follows,

Net income after tax = Net Income before tax (1-tax rate)

From the above equation we can calculate Net income before tax as follows,

Net income before tax= Net Income after tax/(1-tax rate)

Net income before tax=1,80,000/(1-40%)

Net income before tax=3,00,000