The income statement for Big Booty Leggings summarized for a four-year period sh

Question

The income statement for Big Booty Leggings 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 $26,000. The company uses a periodic inventory system.

2016 2017 2018 2019 Sales revenue $ 2,044,000 $ 2,450,000 $ 2,701,000 $ 2,986,000 Cost of goods sold 1,485,000 1,616,000 1,762,000 2,109,000 Gross profit 559,000 834,000 939,000 877,000 Expenses 475,000 499,000 532,000 540,000 Pretax income 84,000 335,000 407,000 337,000 Income tax expense (30%) 25,200 100,500 122,100 101,100 Net income $ 58,800 $ 234,500 $ 234,500 $ 235,900 Required 1. Prepare the income statements to reflect the correct amounts, taking into consideration the inventory error PRUITT COMPANY Income Statement For the Four-Year Period 2016 2017 2018 2019 Sales revenue Cost of goods sold Gross proft Expenses Pretax income Income tax expense (30%) Net income $2,044,000 2,450,000 $2,701,000 2,986,000 2,109,000 877,000 540,000 337,000 101,100 $ 235,900 1,485,0001,642,000 808,000 499,000 309,000 92,700 $ 58,800 216,300 559,000 475,000 84,000 25,200 532,000

Explanation / Answer

2016 2017 2018 2019 Sales revenue 2,044,000 2,450,000 2,701,000 2,986,000 Cost of goods sold 1,485,000 1,642,000 1,736,000 2,109,000 Gross profit 559,000 808,000 965,000 877,000 Expenses 475,000 499,000 532,000 540,000 Pretax income 84,000 309,000 433,000 337,000 Income tax expense (30%) 25,200 92,700 129,900 101,100 Net income 58,800 216,300 303,100 235,900 2016 2017 2018 2019 Before Correction 27% 34% 35% 29% After Correction 27% 33% 36% 26% Effect on Income tax expense 2017 Overstatement 7,800 2018 Understatement -7,800

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