Boswell Electric prepared the following condensed income statements for two successive years:
| 2007 | 2006 |
Sales | $2,000.000 | $1,500,000 |
Cost of goods sold | 1.250,000 | 900,000 |
Gross profit on sales | $ 750.000 | $ 600.000 |
Operating expenses | 400,000 | 350,000 |
Net income | $ 350,000 | $ 250,000 |
At the end of 2006 (right-hand column above), the inventory was understated by $40,000. but the error was not discovered until after the accounts had been closed and financial statements prepared at the end of 2007. The balance sheets for the two years showed owner’s equity of $500,000 at the end of 2006 and $580.000 at the end of 2007. (Boswell is organized as a sole proprietorship and does not incur income taxes expense.)
a. Compute the corrected net income figures for 2006 and 2007.
b. Compute the gross profit amounts and the gross profit percentages for each year based on corrected data.
c. What correction, if any. should be made in the amounts of the company’s owner’s equity at the end of 2006 and at the end of 2007?
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