Question

Lotus Blue Pte Ltd uses a periodic inventory system. In its physical stock count taken at 31 December 2012, Lotus Blue’s employees failed to count the merchandise in the store’s window display. The cost of these merchandise amounted to $2,300. Lotus Blue reported a pretax income of $267,000 and $355,000 for the financial year ended 31 December 2012 and 31 December 2013 respectively.

1. Lotus Blue Ltd Compute Lotus Blue's correct pretax income for the year ended 31 December 2012 and 2013. In the table below, write "understated" or "overstated”, along with the value, to record the impact on the affected variables in the cost of goods equation 2012 2013 Beginning Inventory + Purchases - Ending Inventory = COGS Gross Profit Based on the impact determined above, calculate the correct pre-tax profit. 2012 Correct Pretax income = 2013 Correct Pretax income =

Answer 1

a.

	2012	2013
Beginning Inventory	No effect	Understated by $2,300
Purchases	No effect	No effect
Ending Inventory	Understated by $2,300	No effect
COGS	Overstated by $2,300	Understated by $2,300
Gross Profit	Understated by $2,300	Overstated by $2,300

2012 Correct pretax Income = $269,300

2013 Correct Pretax Income = $352,700