You have been given the following information for Ross's Rocket Corp.: Net sales = $1,000,000; Gross profit = $400,000; Addition to retained earnings = $60,000; Dividends paid to preferred and common stockholders = $90,000; Depreciation expense = $50,000. The firm's tax rate is 40 percent. What are the cost of goods sold and the interest expense for Ross's Rocket Corp.?
A) $100,000, and $600,000, respectively
B) $600,000, and $100,000, respectively
C) $600,000, and $200,000, respectively
D) $700,000, and $100,000, respectively

Question

Quizplus · Accepted Answer

Cost of Goods Sold (COGS) is calculated as Net Sales - Gross Profit = $1,000,000 - $400,000 = $600,000. To find the interest expense, we need to work backwards from the addition to retained earnings. The formula for retained earnings is Net Income - Dividends = Addition to Retained Earnings. We need to find Net Income first, which requires calculating Earnings Before Taxes (EBT). EBT is found by adding back taxes and interest to the addition to retained earnings, but since we don't have the exact tax amount, we use the given tax rate and the relationship between net income, taxes, and EBT. The calculation involves several steps, including adjusting for dividends and using the tax rate to estimate taxes and thus EBT and interest expense. The correct interest expense, given the provided information and typical financial calculations, aligns with option B's logic.

You Have Been Given the Following Information for Ross's Rocket