Rose Inc. reports gross profit as $200,000 in 20X1 and $260,000 in 20X2. However, an astute accountant discovers that mistakes were made in each year in determining ending inventory. At the end of 20X1, merchandise costing $18,000 was omitted from the year-end physical inventory count. At the end of 20X2, merchandise costing $7,000 was accidentally counted twice. What does the accountant believe the gross profit should be for 20X2?
A) $249,000
B) $235,000
C) $271,000
D) $285,000
Under stated ending inventory in year 2001 ( or under stated beginning inventory in year 2002) = $18,000
Over stated ending inventory in 2002 = $7,000
Incorrect gross profit of 2002 = $260,000
Correct gross profit of 2002 = Incorrect gross profit of 2002 - Over stated ending inventory in 2002 - Under stated ending inventory in year 2001
= 260,000-7,000-18,000
= $235,000
Hence, correct gross profit of 2002 should be $235,000.
Due to understated beginning inventory of $18,000 in 2002, cost of goods sold would have been lower and gross profit would have been higher by $18,000 must be subtracted from gross profit calculated to find out correct gross profit.
Due to over stated ending inventory of $7,000 in 2002, cost of good sold would have been lower and gross profit would have been higher by $7,000, hence to correct this $7,000 must be subtracted from gross profit calculated to find out correct gross profit.
Correct option is B.
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Rose Inc. reports gross profit as $200,000 in 20X1 and $260,000 in 20X2. However, an astute...