QUESTION

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

2. Compute the gross profit percentage for each year before the correction and after the correction. (Round your answers to the nearest whole percent.)

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

Required information (The following information applies to the questions displayed below.) The income statement for Pruitt Company summarized for a four-year period shows the following: Sales revenue Cost of goods sold Gross profit Expenses Pretax income Income tax expense (30%) Net income 2016 $ 2,044,000 1,489,000 555,000 486,000 69,000 20,700 $ 48,300 2017 $ 2, 452,000 1,619,000 833,000 494,000 339,000 101,700 $ 237,300 2018 $ 2,708,000 1,765,000 943,000 520,000 423,000 126,900 $ 296,100 2019 $ 2,988,000 2,097,000 891,000 522,000 369,000 110,700 $ 258,300 An audit revealed that in determining these amounts, the ending inventory for 2017 was overstated by $30,000. The company uses a periodic inventory system. 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 2017 2018 2019 2016 % % % % Before correction After correction % % % % 2017 2018 2019 2016 % % % % Before correction After correction % % % %