Question

The following account balances were drawn from the financial records of Kent Company (KC) as of January 1, 2018: Assets, $35,000; Liabilities, $6,000; Common Stock, $12,000; and Retained Earnings, $17,000. KC has agreed to pay the creditors $400 of interest per year. Further, KC agrees that for the 2018 fiscal year any annual earnings remaining after the interest charges will be paid out as dividends to the owners. Required Assuming KC earns a before interest expense recognition profit of $1,600 during 2018, determine the amount of interest and dividends paid. Assuming KC earns a before interest expense recognition profit of $900 during 2018, determine the amount of interest and dividends paid. Assuming KC earns a before interest expense recognition profit of $300 during 2018, determine the amount of interest and dividends paid.

Answer 1

Kent Company (KC) pays a fixed annual interest of $400. For 2018, KC would pay $1,200, $500, and $0 in dividends for profits of $1,600, $900, and $300, respectively, after paying the interest.

Step-by-step explanation:

To determine the amount of interest and dividends paid by Kent Company (KC) in the three given scenarios, we first acknowledge that the interest paid is a fixed amount of $400 per year. After paying interest, the remaining profit (if any) is distributed as dividends.

• If KC earns a profit of $1,600 before interest in 2018, the interest paid is $400, leaving $1,200 for dividends.
• For a profit of $900, after paying $400 as interest, KC has $500 available to pay as dividends.
• With a profit of $300, the entire profit after paying interest is insufficient to cover the interest payment, leaving no earnings to be distributed as dividends.

Therefore, the amount of dividends varies based on the profit earned, whereas the interest payment remains constant.

Answer 2

Earnings = $1,600, Interest = $400, Dividend = $1,200

Earnings = $900, Interest = $400, Dividend = $500

Earnings = $300, Interest = $400, Dividend = $0

Step-by-step explanation:

As not provided, taxes are ignored.

Provided interest to be paid to creditors = $400

Case 1

Earnings before interest and taxes = $1,600

Less: Interest = $400

Earnings after interest = $1,200

Dividend to shareholders = $1,200

Case 2

Earnings before interest and taxes = $900

Less: Interest = $400

Earnings after interest and taxes = $500

Dividend to shareholders = $500

Case 3

Earnings before interest and taxes = $300

Less: Interest = $300

Earnings after interest = - $100

Since the earnings are negative, as company is facing losses, no dividend will be distributed.