Question

In 2022: Net sales are expected to increase by $9.70 million. Cost of goods sold is expected to be 60 percent of net sales. Depreciation and other operating expenses are expected to be the same as in 2021. Interest expense is expected to be $2,105,000. The tax rate is expected to be 30 percent of EBT. Dividends paid to preferred and common stockholders will not change. Calculate the addition to retained earnings expected in 2022.

Answer 1

Answer:

The question is not complete.

Here is the complete question:

You have been given the following information for PattyCake’s Athletic Wear Corp. for the year 2021:

Net sales = $38,900,000.

Cost of goods sold = $22,220,000.

Other operating expenses = $6,400,000.

Addition to retained earnings = $1,210,500.

Dividends paid to preferred and common stockholders = $1,943,000.

Interest expense = $1,850,000.

The firm’s tax rate is 30 percent.

In 2022:

Net sales are expected to increase by $9.90 million.

Cost of goods sold is expected to be 60 percent of net sales.

Depreciation and other operating expenses are expected to be the same as in 2021.

Interest expense is expected to be $2,125,000.

The tax rate is expected to be 30 percent of EBT.

Dividends paid to preferred and common stockholders will not change.

Calculate the addition to retained earnings expected in 2022. (Enter your answer in dollars, not millions.)

Here is the answer:

Addition to retained earnings is $ 5,753,500

Explanation:

Addition to retained earnings is derived after deducting dividend paid to preferred and common stockholders from the earnings after tax of the entity.

In the case of PattyCake’s Athletic Wear Corp. , it is important to calculate earning after tax before deducting dividend to get addition to retained earnings:

Calculation of Earning after Tax

Earning after Tax is derived by deducting, cost of sales, operating expenses, interest and tax from the entity net sales.

Net Sales ( $38,900,000.  + $9,900,000)                        48,800,000

Cost of Sales (0.6  *    48,800,000)                                  (29,280,000)

Gross profit                                                                         19,520,000

Depreciation and other operating expenses                    (6,400,000)

Earning before Interest and Tax                                        13,120,000

Interest                                                                                 (2,125,000)

Earning before Tax                                                             10,995,000

Tax @ 30% EBT                                                                   (3,298,500)

Earning after Tax                                                                7,696,500

After this, dividend paid is removed to get addition to retained earnings

= $7,696,500  - $1,943,000

=$ 5,753,500