At Ruth Company, events and transactions during 2014 included the following. The tax rate for all items is 30%.(1) Depreciation for 2012 was found to be understated by $90,000.(2) A strike by the employees of a supplier resulted in a loss of $75,000.(3) The inventory at December 31, 2012 was overstated by $120,000.(4) A flood destroyed a building that had a book value of $1,500,000. Floods are very uncommon in that area.The effect of these events and transactions on 2014 income from continuing operations net of tax would be
A) ($52,500).
B) ($115,500).
C) ($199,500).
D) ($1,249,500).

Question

Quizplus · Accepted Answer

The correct answer is A because the understatement of depreciation in 2012 would increase 2014 income by $90,000 x (1 - 30%) = $63,000. The loss from the strike would decrease income by $75,000 x (1 - 30%) = $52,500. The overstatement of inventory in 2012 would decrease 2014 income by $120,000 x (1 - 30%) = $84,000. The flood loss would decrease income by $1,500,000 x (1 - 30%) = $1,050,000. The net effect of these events and transactions on 2014 income from continuing operations net of tax would be ($52,500).

At Ruth Company, Events and Transactions During 2014 Included the Following