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Papa Roach Exterminators, Inc., has sales of $729,000, costs of $315,000, depreciation expense of $50,000, interest...

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?
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Answer #1

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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