Question

Rulix Watch Company reported the following income statement data for a 2-year period. 2018 2019 Sales...

Rulix Watch Company reported the following income statement data for a 2-year period.

2018

2019

Sales revenue

$220,000

$250,000

Cost of goods sold
   Beginning inventory 32,000 44,000
   Cost of goods purchased

173,000

202,000

   Cost of goods available for sale 205,000 246,000
   Ending inventory

44,000

52,000

      Cost of goods sold

161,000

194,000

Gross profit

$59,000

$56,000


Rulix Watch Company uses a periodic inventory system. The inventories at January 1, 2018, and December 31, 2019, are correct. However, the ending inventory at December 31, 2018, was overstated $6,000.

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(a)

Prepare correct income statement data for the 2 years.

2018

2019

Sales $

$

Cost of goods sold
   Beginning inventory

   Cost of goods purchased

   Cost of goods available for sale

   Ending inventory

   Cost of goods sold

Gross profit $

$

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Answer #1

Ending inventory at December 31, 2018 is overstated by $6000.It should have been $38000 (instead of given amount of $44000). When we correct this error, it will result in reduction of gross profit by $6000. New gross profit in 2018 will be $53000.

When the Ending inventory at December 31, 2018 is overstated by $6000, it will mean that the beginning inventory at December 31, 2019 will also be overstated by $6000, because ending inventory in December 2018 is the beginning inventory for 2019. So, beginning inventory for 2019 will also be $38000. When we correct this error, it will result in increasing the amount of cost of goods available for sale in 2019 to $240000. This will also lead to reduction of cost of goods sold in 2019. When the cost of goods sold is reduced, it will increase the gross profit in 2019 to $62000. Required income statement is given below:

Income statement:

2018 2019
Sales $220000 $250000
Cost of goods sold
Beginning inventory 32000 38000
Cost of goods purchased 173000 202000
Cost of goods available for sale 205000 240000
Ending inventory 38000 52000
Cost of goods sold 167000 188000
Gross Profit $53000 $62000
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