(Alternate is 7-66.) The following data are from the 20X1 income statement of th
ID: 2820973 • Letter: #
Question
(Alternate is 7-66.) The following data are from the 20X1 income statement of the Atiyeh Ruc Emporium ($ in thousands): 7-59 Inventory Errors $1,650 Sales Deduct cost of goods sold $390 820 1,210 370 Beginning inventory Purchases Cost of goods available for sale Deduct: Ending inventory Cost of goods sold Gross profit Other expenses Income before income taxes Income tax expense at 40% Net income 840 810 610 200 80 $ 120 The ending inventory was overstated by $20,000 because of erors in the physical count. The income tax rate was 40% in 20X1 and 20X2. 1. Which items in the income statement are incorrect and by how much? Use O for overstated, U understated, and N for not affected. Complete the following tabulation (amounts in thousands) 20X1 20X2 Beginning inventory Ending inventory Cost of goods sold Gross margin Income before income taxes Income tax expense Net income 0 $20 2. What is the dollar effect of the inventory error on retained earnings at the end of 201 the end of 20X2?Explanation / Answer
(1).
20X1
20X2
Beginning inventory
N
O $20
Ending inventory
O $20
N
Cost of goods sold
U $20
O $20
Gross margin
O $20
U $20
Income before income taxes
O $20
U $20
Income tax expense
O $8
U $8
Net income
O $12
U $12
(2).
Dollar effect on retained earnings at the end of 20X1 = Overstated by $12 thousand
Dollar effect on retained earnings at the end of 20X2 = No effect
20X1
20X2
Beginning inventory
N
O $20
Ending inventory
O $20
N
Cost of goods sold
U $20
O $20
Gross margin
O $20
U $20
Income before income taxes
O $20
U $20
Income tax expense
O $8
U $8
Net income
O $12
U $12
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