The income statement for Pruitt Company summarized for a four-year period shows

Question

The income statement for Pruitt Company summarized for a four-year period shows the following: 2014 2015 2016 2017 Sales revenue $ 2,027,000 $ 2,469,000 $ 2,714,000 $ 2,982,000 Cost of goods sold 1,505,000 1,619,000 1,778,000 2,107,000 Gross profit 522,000 850,000 936,000 875,000 Expenses 485,000 511,000 524,000 537,000 Pretax income 37,000 339,000 412,000 338,000 Income tax expense (35%) 12,950 118,650 144,200 118,300 Net income $ 24,050 $ 220,350 $ 267,800 $ 219,700 An audit revealed that in determining these amounts, the ending inventory for 2015 was overstated by $27,000. The company uses a periodic inventory system. 3.value: 10.00 pointsRequired information Required: 1. Prepare the income statements to reflect the correct amounts, taking into consideration the inventory error. ReferenceseBook & Resources ProblemDifficulty: Hard Check my work 4.value: 10.00 pointsRequired information 2. Compute the gross profit percentage for each year before the correction and after the correction. (Round your answers to the nearest whole percent.) ReferenceseBook & Resources ProblemDifficulty: Hard Check my work 5.value: 10.00 pointsRequired information 3. What effect would the error have had on the income tax expense assuming a 35 percent average rate?

Explanation / Answer

Ans;

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Gross profit percentage

Before correction = 25.68% , 33.59% , 34% , 28.97%

After correction = 25.68% , 32.86% , 34.67% , 28.97%

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            96,000

Increase/(Decrease) Nil (5400) 5400 nil

2014 2015 2016 2017 Sales revenue        2,025,000        2,450,000        2,700,000        2,975,000 Cost of goods sold        1,505,000        1,645,000        1,764,000        2,113,000 Gross profit           520,000           805,000           936,000           862,000 Expenses           490,000           513,000           538,000           542,000 Pretax income             30,000 292,000           398,000           320,000 Income tax expense (30%)               9,000 87,600           119,400             96,000 Net income             21,000 204,400           278,600           224,000

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