Analyzing and Interpreting the Effects of Inventory Errors
The income statement for Pruitt Company summarized for a four-year period shows the following:

An audit revealed that in determining these amounts, the ending inventory for 2012 was overstated by $18,000. The company uses a periodic inventory system.
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 averagerate?

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2011 2013 2012 2014 $2,025,000 1,505,000 520,000 490,000 30,000 $2,700,000 1,782,000 Sales revenue Cost of goods sold Gross profit Expenses Pretax income Income tax expense (30%) $2.450,000 $2,975,000 1,627,000 918,000 862,000 542,000 320,000 513,000 310,000 93,000 538,000 380,000 9,000 114,000 $ 266,000 96,000 Net income $ 224,000 $ 21,000 $ 217,000