Question

Presented below are the income statements for Saldron Manufacturing for the years ended December 31, 20X2, and 20X1.

                                                            Saldron Manufacturing

                                                    Comparative Income Statements

                                                      For years ending December 31

                                                                                                      20X2                     20X1

Sales                                                                            $790                     $620

Less: Cost of Goods Sold:

Beginning Inventory                                                   70                          60

Purchases                                                                  510                       420

Cost of Goods Available for Sale         580                       480

Less: Ending Inventory                                             90                          70

Cost of Goods Sold                                                   490                       410

Gross Profit                                                                 300                      210

Less: Operating Expenses                                        60                          50

Income Before Taxes                                                 240                      160

Income Tax Expense (40%)                                     96                          64

Net Income                                                                $144                      $ 96

In 20X3 it was discovered that the 20X1 ending inventory was understated by $20, and the 20X2 ending inventory was overstated by $10. The 20X1 beginning inventory was correctly stated.

Identify the accounts which are incorrect on the 20X1, 20X2, income statements. State the dollar error (by how much they are incorrect) and whether the amounts overstate or understate balances.

Copy the question and write your answer next to the number. For example next to Ending inventory of 20X1 you need to write (20 under)

Answer 1

Solution:
	Ending inventory of 20x1 was understated by $20,
	Rectified ending inventory of 20x1 = $70 + $20 = $90
	Ending inventory of 20x2 was overstated by $10,
	Rectified ending inventory of 20x2 = $90 - $10 = $80
	Saldron Manufacturing
	Comparative Income Statements
	For years ending December 31
		20x2	Error	Revised	20x1	Error	Revised
				Amount			Amount
	Sales	$790		$790	$620		$620
	Less: Cost of Goods Sold:
	Beginning Inventory	$70	$20	$90	$60		$60
	Purchases	$510		$510	$420		$420
	Cost of Goods Available for Sale	$580	$20	$600	$480		$480
	Less: Ending Inventory	$90	($10)	$80	$70	$20	$90
	Cost of Goods Sold	$490	$30	$520	$410	($20)	$390
	Gross Profit	$300	($30)	$270	$210	$20	$230
	Less: Operating Expenses	$60		$60	$50		$50
	Income Before Taxes	$240	($30)	$210	$160	$20	$180
	Income Tax Expense (40%)	$96	($12)	$84	$64	$8	$72
	Net Income	$144	($18)	$126	$96	$12	$108
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