On February 17, 2011, Fernandes Company purchases inventory and pays $740,000 fo

Question

On February 17, 2011, Fernandes Company purchases inventory and pays $740,000 for the entire purchase. However, Fernandes does not record the purchase transaction and does not count half of the purchased inventory in ending inventory. The applicable tax rate for Fernandes is 35 percent. These errors will cause the 2011 net income to be

Overstated by $129,500

Understated by $240,500

Understated by $370,000

Overstated by $240,500

Overstated by $129,500

Understated by $240,500

Understated by $370,000

Overstated by $240,500

Explanation / Answer

Net income will be understated by 240500 (740000/2*(1-0.35)) Option 2 is correct

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