P7-9 (Algo) Analyzing and Interpreting the Effects of Inventory Errors LO7-7

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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	$	2,042,000	$	2,470,000	$	2,717,000	$	2,990,000
Cost of goods sold		1,487,000		1,616,000		1,775,000		2,098,000
Gross profit		555,000		854,000		942,000		892,000
Expenses		490,000		494,000		522,000		541,000
Pretax income		65,000		360,000		420,000		351,000
Income tax expense (30%)		19,500		108,000		126,000		105,300
Net income	$	45,500	$	252,000	$	294,000	$	245,700

An audit revealed that in determining these amounts, the ending inventory for 2017 was overstated by $15,000. 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 (35%) Net income 3. What effect would the error have had on the income tax expense assuming a 35 percent average rate? Income Tax Expense 2017 2018 2. Compute the gross profit percentage for each year before the correction and after the correction. (Round your answers to the nearest whole percent.) Before correction After correction 2016 % % 2017 % % 2018 % % 2019 % %