Kathleen Inc. during a review of its books in 20X3 found the following error: Overhead costs that were not directly attributable to inventory were included in the amount capitalized for inventory. These costs represented storage and corporate overhead costs that were allocated by management, but did not quality for capitalization under the inventory standard. The total costs included in inventory were as follows:

Required:
1. Calculate the impact on each year’s pre-tax earnings.
2. Prepare the adjusting journal entry in 20X3.

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20X0 20X1 20X2 Kathleen Inc's tax rate is 25%. Inventory Balance $540,000 $463,000 $623,000 Costs Erroneously Included in Inventory $12,700 $32,040 $28,200