Analyzing and Interpreting the Effects of Inventory Errors The income statement for Pruitt Company summarized for a four year period show the following:
|
2011 |
2012 |
2013 |
2014 |
|
|
Sales revenue |
$2,025,000 |
$2,450,000 |
$2,700,000 |
$2,975,000 |
|
Cost of goods sold |
1,505,000 |
1,627,000 |
1,782,000 |
2,113,000 |
|
Gross profit |
520,000 |
823,000 |
918,000 |
862,000 |
|
Expenses |
490,000 |
513,000 |
538,000 |
542,000 |
|
Pretax income |
30,000 |
310,000 |
380,000 |
320,000 |
|
Income tax expense (30%) |
9,000 |
93,000 |
114,000 |
96,000 |
|
Net income |
$21,000 |
$217,000 |
$266,000 |
$224,000 |
An audit revealed that in determining these amounts, the ending inventory for 2012 was overstated by $18,000. The company uses a periodic inventory system.
Required:
1. Recast the income statements to reflect the correct amounts, taking into consideration the inventory error.
2. Compute the gross profit percentage for each year ( a ) before the correction and ( b ) after the correction.
3. What effect would the error have had on the income tax expense assuming a 30 percent average rate?