Branson Electric prepared the following condensed income statements for two successive years.

At the end of 2020 (right-hand column), the inventory was understated by $40,000, but the error was not discovered until after the accounts had been closed and financial statements prepared at the end of 2021. The balance sheets for the two years showed owner’s equity of $500,000 at the end of 2020 and $580,000 at the end of 2021. (Branson is organized as a sole proprietorship and does not incur income taxes expense.)
a. Compute the corrected net income figures for 2020 and 2021.
b. Compute the gross profit amounts and the gross profit percentages for each year on the basis of corrected data.
c. What correction, if any, should be made in the amounts of the company’s owner’s equity at the end of 2020 and at the end of 2021?

Transcribed Image Text:

Sales ...... Cost of goods sold Gross profit on sales.. Operating expenses.. Net income... 2021 2020 $2,000,000 $1,500,000 1,250,000 900,000 $ 750,000 $ 600,000 400,000 350,000 $ 350,000 $ 250,000