Income Statement 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

We can use the formula for calculating net income:
Net sales - Cost of goods sold - Depreciation expense - Interest expense - Taxes = Net income

We know:
Net sales = $1,000,000
Gross profit = $400,000
Addition to retained earnings = $60,000
Dividends paid = $90,000
Depreciation expense = $50,000
Tax rate = 40%

First, let's calculate the cost of goods sold:
Net sales - Gross profit = Cost of goods sold
$1,000,000 - $400,000 = $600,000

Next, we can rearrange the net income formula to solve for interest expense:
Net sales - Cost of goods sold - Depreciation expense - Interest expense - Taxes = Net income
Interest expense = Net sales - Cost of goods sold - Depreciation expense - Taxes - Net income
Interest expense = $1,000,000 - $600,000 - $50,000 - (0.4 x ($1,000,000 - $60,000 - $400,000 - $50,000)) - $10,000
Interest expense = $100,000

Therefore, the cost of goods sold is $600,000 and the interest expense is $100,000. The correct answer is B.

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