Question

The following account balances were drawn from the financial records of Kent Company (KC) as of January 1, 2018: Assets, $35,000; Liabilities, $6,000; Common Stock, $12,000; and Retained Earnings, $17,000. KC has agreed to pay the creditors $400 of interest per year. Further, KC agrees that for the 2018 fiscal year any annual earnings remaining after the interest charges will be paid out as dividends to the owners. Required Assuming KC earns a before interest expense recognition profit of $1,600 during 2018, determine the amount of interest and dividends paid. Assuming KC earns a before interest expense recognition profit of $900 during 2018, determine the amount of interest and dividends paid. Assuming KC earns a before interest expense recognition profit of $300 during 2018, determine the amount of interest and dividends paid.

Answer 1

Answer:

Earnings = $1,600, Interest = $400, Dividend = $1,200

Earnings = $900, Interest = $400, Dividend = $500

Earnings = $300, Interest = $400, Dividend = $0

Explanation:

As not provided, taxes are ignored.

Provided interest to be paid to creditors = $400

Case 1

Earnings before interest and taxes = $1,600

Less: Interest = $400

Earnings after interest = $1,200

Dividend to shareholders = $1,200

Case 2

Earnings before interest and taxes = $900

Less: Interest = $400

Earnings after interest and taxes = $500

Dividend to shareholders = $500

Case 3

Earnings before interest and taxes = $300

Less:  Interest = $300

Earnings after interest = - $100

Since the earnings are negative, as company is facing losses, no dividend will be distributed.