Use the following information for questions
At Hall Company, events and transactions during 2007 included the following.The tax rate for all items is 30%.
(1) Depreciation for 2005 was found to be understated by $30,000.
(2) A strike by the employees of a supplier resulted in a loss of $25,000.
(3) The inventory at December 31, 2005 was overstated by $40,000.
(4) A flood destroyed a building that had a book value of $500,000.Floods are very uncommon in that area.
-The effect of these events and transactions on 2007 income from continuing operations net of tax would be
A)$17,500.
B)$38,500.
C)$66,500.
D)$416,500.

Question

Quizplus · Accepted Answer

The correct answer is A. The understatement of depreciation in 2005 will increase 2007 income by $30,000 x (1 - .30) = $21,000. The loss from the strike will decrease income by $25,000 x (1 - .30) = $17,500. The overstatement of inventory in 2005 will increase 2007 income by $40,000 x (1 - .30) = $28,000. The loss from the flood will decrease income by $500,000 x (1 - .30) = $350,000. The net effect of these events and transactions on 2007 income from continuing operations net of tax is $21,000 + $17,500 + $28,000 - $350,000 = $17,500.

Use the Following Information for Questions