P7-6 (Algo) Analyzing and Interpreting the Effects of Inventory Errors LO7-5

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

	2016	2017	2018	2019
Sales revenue	$2,035,000	$2,456,000	$2,717,000	$2,990,000
Cost of goods sold	1,495,000	1,623,000	1,775,000	2,093,000
Gross profit	540,000	833,000	942,000	897,000
Expenses	484,000	509,000	522,000	527,000
Pretax income	56,000	324,000	420,000	370,000
Income tax expense (30%)	16,800	97,200	126,000	111,000
Net income	$39,200	$226,800	$294,000	$259,000

An audit revealed that in determining these amounts, the ending inventory for 2017 was overstated by $25,000. The company uses a periodic inventory system.

Required:

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

PRUITT COMPANY
Income Statement
For the Four-Year Period
	2016	2017	2018	2019
Sales revenue
Cost of goods sold
Gross profit
Expenses
Pretax income
Income tax expense (30%)
Net income