Income, Expenses and Retained Earnings Question

by Roderick Merritt
(Goldsboro, NC, USA)

Q: Andersen's Nursery has sales of $318,400, cost of $199,400, depreciation expense of $28,600, interest expense of $1,000, and a tax rate of 34%. The firm paid out $16,500 in dividends.

What is the addition to retained earnings?

nursery business

Great question Roderick and a good example of income and profits and their distribution for a company.

Here's the solution (income statement):

Sales $318,400
Less: Cost of sales $199,400
Gross Profit $119,000 ($318,400-$199,400)
Less: Depreciation $28,600
Less: Interest expense $1,000
Net profit before tax $89,400 ($119,400 - $28,600 - $1,000)
Less: Tax $30,396 ($89,400 X 34/100)
Net profit after tax $59,004 ($89,400 - $30,396)

If $16,500 of the net profit after tax was paid out in dividends then
$42,504 ($59,004 - $16,500) was left over for the retained earnings account.

  • Retained earnings is an account where a company accumulates profits (earnings) and from which dividends are paid to the owners. It is a type of reserve. Reserves are the 2nd main type of equity besides capital. Both capital (invested assets, usually cash) and reserves (accumulated profits) belong to the owner.

  • Depreciation is an expense recording the gradual decrease of an asset's value over time. You can get a bunch of in-depth lessons, examples and exercises on depreciation in my basic accounting books.

  • Dividends are a payout of profits (usually in the form of cash) to the owners of a company. They are like drawings but specifically for a company. Owners in a company are called shareholders.


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