USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2) QUESTIONS: Sparky Inc. repo

Question

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2) QUESTIONS:

Sparky Inc. reported income from continuing operations for the year ended December 31, 2014 of $790,000. Sparky has a 30% tax rate. Upon review of additional information that just became available, Sparky feels this calculation might be in error:

At the beginning of 2012, Sparky purchased a machine for $540,000 (salvage value of $40,000) that had a useful life of 5 years. The bookkeeper used straight-line depreciation for 2012, 2013 and 2014, but failed to deduct the salvage value in computing the depreciation expense each year.

Based on this new information, determine the correct Income from Continuing Operations for the period ended December 31, 2014:

Referring to the information presented in the question directly abovbe, determine the Prior Period Adjustment (after tax) that should be reported on Sparky's Retained Earnings Statement. If the correction to prior years income (after tax) should increase the beginning retained earnings balance, enter your answer as a positive number. If the correction to prior years income (after tax) should decrease the Retained Earnings balance, enter your answer in parenthesis ( ).

Prior Period Adjustment (net of tax):

Explanation / Answer

Sparky Inc Machine purchase cost                       540,000.00 residual value                         40,000.00 Useful life years                                    5.00 Depreciable value                       500,000.00 Annual SL depreciation                       100,000.00 Annual SL depreciation wrongly calculated                         108,000.00 Additional depreciation per year                            8,000.00 Income from continuing Operation For the period ended Dec31.2014. Income prior to depreciation adjustment                       790,000.00 Add: Depreciation overstated                            8,000.00 Corrected Income from continuing Operation                       798,000.00 For years 2012 & 2013 Total Depreciation overstated                         16,000.00 Tax effect @30%                            4,800.00 Amount credited to reatined earning                         11,200.00 So retained earning will be credited by                         11,200.00 Deferred Tax Liability Credited by                            4,800.00

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