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. Assuming that no correcting entries and no other errors were made, these errors will cause the 2012 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

Purchases not recorded - expenses reduced by $740,000 (Profit increased)

Closing stock not recoreded (50%) so recorded = 50% = $370,000

Net effect on profit = $740,000-$370,000 = $370,000 Increased

Tax effect (Net profit to be reduced) = $370,000*35% = $129,500

Net decrese in net profit = $370,000-$129,500 =$240,500

Ans) Option (D) Overstated by $240,500

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