Analyzing and Interpreting the Effects of Inventory Errors (P7-9)
The income statements for four consecutive years for Colca Company reflected the following summarized amounts:
| 2011 | 2012 | 2013 | 2014 |
Sales revenue | $60,000 | $63,000 | $65,000 | $68,000 |
Cost of goods sold | 39,000 | 43,000 | 44,000 | 46,000 |
Gross profit | 21,000 | 20,000 | 21,000 | 22,000 |
Expenses | 16,000 | 17,000 | 17,000 | 19,000 |
Pretax income | $ 5,000 | $ 3,000 | $ 4,000 | $ 3,000 |
Subsequent to development of these amounts, it has been determined that the physical inventory taken on December 31, 2012, was understated by $2,000.
Required:
1. Recast the income statements to reflect the correct amounts, taking into consideration the inventory error.
2. Compute the gross profit percentage for each year (a) before the correction and (b) after the correction.
3. What effect would the error have had on the income tax expense, assuming a 30 percent average rate?
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