The income statements for four consecutive years for Colca Company reflected the following summarized amounts:

Subsequent to development of these amounts, it has been determined that the physical inventory taken on December 31, 2017, was understated by $2,000.

Required:

1. Recast the income statements to reflect the correct amounts, taking into consideration the inventory error.

2. Compute the gross profit percentage for each year (a) before the correction and (b) after the correction.

3. What effect would the error have had on the income tax expense, assuming a 30 percent average rate?

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2016 2017 2018 2019 Sales revenue Cost of goods sold Gross profit Expenses $63,000 43,000 $60,000 39,000 $65,000 $68,000 44,000 46,000 21,000 16,000 20,000 21,000 22,000 19,000 17,000 17,000 $ 3,000 $ 4,000 $ 3,000 $ 5,000 Pretax income