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A corporation had year end 2017 and 2018 retained earnings balances of $230,000 and $360,000, respectively
A corporation had year end 2017 and 2018 retained earnings balances of $230,000 and $360,000, respectively. In 2018 the firm paid $110,000 in dividends. If the firm is subject to a 40% tax rate, how much is the Net profits before taxes in 2018? Select one: O a. $400,000 b. $300,000 O c. $600,000 d. $500,000
Expert Solution
Net reserves for the year end 2017 = $230,000
Net reserves for the year end 2018 = $360,000
Profit remained with the company after dividends and taxes = Net reserves for the year end 2018 - Net reserves for the year end 2017
= $360,000 - $230,000
= $130,000
Profit after taxes = Profit remained with the company after dividends and taxes + Dividends payment
Profit after taxes = 130,000 + 110,000
Profit after taxes = $240,000
Profit before tax * (1 - Tax rate) = Profit after taxes
Profit before tax = Profit after taxes / (1 - Tax rate)
Profit before tax = 240,000 / (1 - 40%)
Profit before tax = 240,000 / 0.60
Profit before tax = $400,000
Therefore option A is correct and we get the profir before taxes to be $400,000
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