Income Statement You have been given the following information for Sherry's Sandwich Corp.: net sales = $300,000;
Gross profit = $100,000;
Addition to retained earnings = $30,000;
Dividends paid to preferred and common stockholders = $8,500;
Depreciation expense = $25,000.
The firm's tax rate is 30 percent. What are the cost of goods sold and the interest expense for Sherry's Sandwich Corp.?
A) $20,000, and $200,000, respectively
B) $100,000, and $20,000, respectively
C) $200,000, and $20,000, respectively
D) $200,000, and $36,500, respectively

Question

Quizplus · Accepted Answer

The cost of goods sold is calculated as net sales minus gross profit, which is $300,000 - $100,000 = $200,000. To find the interest expense, we need to calculate the net income before taxes and interest. The net income is the addition to retained earnings plus dividends, which is $30,000 + $8,500 = $38,500. The net income before taxes is net income divided by (1 - tax rate), which is $38,500 / (1 - 0.30) = $55,000. The operating income is gross profit minus depreciation, which is $100,000 - $25,000 = $75,000. The interest expense is operating income minus net income before taxes, which is $75,000 - $55,000 = $20,000.

Income Statement You Have Been Given the Following Information for Sherry's