ACC 421 Week 3
Problem 4-3 (P4-3) (Irregular Items) Tony Rich Inc. reported income
from continuing operations before taxes during 2007 of $790,000.
Additional transactions occurring in 2007 but not considered in the
$790,000 are as follows.
1. The corporation experienced an uninsured flood loss (extraordinary)
in the amount of $80,000 during the year. The tax rate on this item is
46%.
2. At the beginning of 2005, the corporation purchased a machine for
$54,000 (salvage value of $9,000) that had a useful life of 6 years. The
bookkeeper used straight-line depreciation for 2005, 2006, and 2007 but
failed to deduct the salvage value in computing the depreciation base.
3. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax).
4. When its president died, the corporation realized $110,000 from an
insurance policy. The cash surrender value of this policy had been
carried on the books as an investment in the amount of $46,000 (the gain
is nontaxable).
5. The corporation disposed of its recreational division at a loss of
$115,000 before taxes. Assume that this transaction meets the criteria
for discontinued operations.
6. The corporation decided to change its method of inventory pricing
from average cost to the FIFO method. The effect of this change on prior
years is to increase 2005 income by $60,000 and decrease 2006 income by
$20,000 before taxes. The FIFO method has been used for 2007. The tax
rate on these items is 40%.
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