Question

At Ruth Company, during 2014:

Depreciation for 2012 was understated by $90,000.
A strike by a supplier's employees resulted in a loss of $75,000.
Inventory at December 31, 2012, was overstated by $120,000.
A flood destroyed a building valued at $1,500,000.

What is the effect of these events on 2014 income from continuing operations net of tax?

A. $52,500
B. $115,500
C. $199,500
D. $1,249,500

Answer 1

The 2014 income from continuing operations at Ruth Company will be adjusted to correct the understatement of depreciation for 2012, but the supplier's strike, inventory overstatement, and flood loss are considered one-time or non-operating items and won't affect continuing operations' income.

Step-by-step explanation:

The effect of the events on 2014 income from continuing operations net of tax at Ruth Company includes various adjustments. The understatement of depreciation for 2012 will decrease income as it would need to be corrected in 2014. However, the loss due to the supplier's strike and the inventory overstatement in 2012 are not part of continuing operations since they are one-time corrections or non-operating losses and therefore will not affect 2014 income from continuing operations. The destruction of a building due to flood is also a non-operating loss and insurance recovery, if any, would be considered in calculating net income, not income from continuing operations.