The income statement for Pruitt Company summarized for a four-year period shows
ID: 2336074 • Letter: T
Question
The income statement for Pruitt Company summarized for a four-year period shows the following:
An audit revealed that in determining these amounts, the ending inventory for 2017 was overstated by $27,000. The company uses a periodic inventory system.
1.
Prepare the income statements to reflect the correct amounts, taking into consideration the inventory error.
2. Compute the gross profit percentage for each year before the correction and after the correction. (Round your answers to the nearest whole percent.)
3. What effect would the error have had on the income tax expense assuming a 35 percent average rate?
2016 2017 2018 2019 Sales revenue $ 2,028,000 $ 2,456,000 $ 2,714,000 $ 2,983,000 Cost of goods sold 1,500,000 1,618,000 1,775,000 2,102,000 Gross profit 528,000 838,000 939,000 881,000 Expenses 480,000 494,000 519,000 528,000 Pretax income 48,000 344,000 420,000 353,000 Income tax expense (35%) 16,800 120,400 147,000 123,550 Net income $ 31,200 $ 223,600 $ 223,600 $ 229,450 PRUITT COMPANY Income Statement For the Four-Year Period 2016 2017 2018 2019 Sales revenue Cost of goods sold Gross profit Expenses Pretax income Income tax expense (35%) Net incomeExplanation / Answer
2016
2017
2018
2019
Sales revenue
$
2,028,000
$
2,456,000
$
2,714,000
$
2,983,000
Cost of goods sold
1,500,000
1618000+27000
1,645,000
1775000-27000
1,748,000
2,102,000
Gross profit
528,000
811,000
966,000
881,000
Expenses
480,000
494,000
494,000
494,000
Pretax income
48,000
317,000
472,000
387,000
Income tax expense (35%)
16,800
110,950
165,200
135,450
Net income
$
31,200
$
206,050
$
306,800
$
251,550
sales
2,028,000
2456000
2714000
2983000
gross profit before adjusmtnet
528,000
838000
939000
881000
Gross profit in %
26.04%
34.12%
34.60%
29.53%
sales
2,028,000
2456000
2714000
2983000
gross profit after adjustment
528000
811000
966000
881000
Gross profit in %
26.04%
33.02%
35.59%
29.53%
Income tax expense before adjustment
2017
overstated
27000*35%
9450
Income tax expense (35%) after adjustment
2018
understated
27000*35%
9450
2016
2017
2018
2019
Sales revenue
$
2,028,000
$
2,456,000
$
2,714,000
$
2,983,000
Cost of goods sold
1,500,000
1618000+27000
1,645,000
1775000-27000
1,748,000
2,102,000
Gross profit
528,000
811,000
966,000
881,000
Expenses
480,000
494,000
494,000
494,000
Pretax income
48,000
317,000
472,000
387,000
Income tax expense (35%)
16,800
110,950
165,200
135,450
Net income
$
31,200
$
206,050
$
306,800
$
251,550
sales
2,028,000
2456000
2714000
2983000
gross profit before adjusmtnet
528,000
838000
939000
881000
Gross profit in %
26.04%
34.12%
34.60%
29.53%
sales
2,028,000
2456000
2714000
2983000
gross profit after adjustment
528000
811000
966000
881000
Gross profit in %
26.04%
33.02%
35.59%
29.53%
Income tax expense before adjustment
2017
overstated
27000*35%
9450
Income tax expense (35%) after adjustment
2018
understated
27000*35%
9450
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