Question

The statements of earnings for Pruitt Company summarized for a four-year period show the following (amounts in thousands of dollars): Sales revenue Cost of sales 2018 2017 2016 2015 $3,625 $4,050 $4,300 $4,575 2,305 2,427 2,582 2,913 Gross profit Operating expenses 1,320 650 1,623 673 1,718 698 1,662 702 Pretax earnings Income tax expense (30%) 670 201 950 285 1,020 306 960 288 Net earnings $ 469 $ 665 $ 714 $ 672 An audit revealed that in determining these amounts, the ending inventory for 2016 was understated by $54. Required: 1. Revise these statements of earnings to reflect the correct amounts. (Do not round intermediate calculations. Round the final answers to the nearest dollar amount.) PRUITT COMPANY Corrected Statement of Earnings 2018 2017 2016 2015 Sales revenue Cost of sales Gross profit Operating expenses Pretax earnings Income tax expense Net earnings 2. Did the error affect the cumulative net earnings for the four-year period? O Not affected O Affected 3. What effect did the error have on the income tax expense for 2016 and 2017? (Do not round intermediate calculations. Round the final answers to the nearest dollar amount.) Income tax expense | 2017 2016

Answer 1

1. Revised Statements

PRUITT Company
Corrected Statement of Earnings
	2018	2017	2016	2015
Sales Revenue	$3,625	$4,050	$4,300	$4,575
Cost of Sales	$2,305	$2,481	$2,528	$2,913
Gross Profit	$1,320	$1,569	$1,772	$1,662
Operating Expenses	$650	$673	$698	$702
Pretax Earnings	$670	$896	$1,074	$960
Income Tax Expense @ 30%	$201	$268.8	$322.2	$288
Net Earnings	$469	$627.2	$751.8	$672

2. Not Affected

Cumulative net earnings before the correction of error = $469+$665+$714+$672 = $2,520

Cumulative net earnings after correction of error = $469+$627.2+$751.8+$672 = $2,520

Hence, there is no affect on cumulative net earnings. i.e Not Affected

3. Effect on Income Tax Expense

Income Tax Expense
	Before Correction	After Correction
2017	$285	$268.8
2016	$306	$322.2