Question

You have been given the following information for Plaid Pillow Corporation :Net sales = $1,680,000; gross profit = $1,160,000; addition to retained earnings = $215,000; dividends paid to preferred and common stockholders = $165,000; operating and depreciation expense = $625,000. The firm's tax rate is 24 percent.

Use Exhibit 1. What is the amount of net income for Plaid Pillow? A. $180,000

B. $220,000

C. $280,000

D. $320,000

E. $380,000

Use Exhibit 1. What are the cost of goods sold (COGS) for Plaid Pillow?

A. less than $300,000

B. more than $300,000 but less than $410,000

C. more than $410,000 but less than $520,000

D. more than $520,000 but less than $630,000

E. more than $630,000

Use Exhibit 1. Assume EBIT = Gross profits – operating and depreciation expense. What is the interest expense for Plaid Pillow? (Hint: Work from the bottom of the income statement up to the top)

A. less than $30,000

B. more than $30,000 but less than $39,000

C. more than $39,000 but less than $48,000

D. more than $48,000 but less than $57,000

E. more than $57,000

Answer 1

Answer 1.

Addition to Retained Earnings = Net Income - Dividends paid to Preferred and Common Stockholders
$215,000 = Net Income - $165,000
Net Income = $380,000

Net income is $380,000

Answer 2.

Gross Profit = Net Sales - Cost of Goods Sold
$1,160,000 = $1,680,000 - Cost of Goods Sold
Cost of Goods Sold = $520,000

Cost of goods sold is more than $520,000, but less than $630,000

Answer 3.

EBIT = Gross Profit - Operating and Depreciation Expense
EBIT = $1,160,000 - $625,000
EBIT = $535,000

Net Income = (EBIT - Interest Expense) * (1 - tax)
$380,000 = ($535,000 - Interest Expense) * (1 - 0.24)
$500,000 = $535,000 - Interest Expense
Interest Expense = $35,000

Interest expense is more than $30,000 but less than $39,000