Several years ago, the financial statements of Gibson Greeting Cards (now owned by American Greetings Corporation) contained the following note:
On July 1, the Company announced that it had determined that the ending inventory . . . had been overstated . . . The overstatement of inventory . . . was $ 8,806,000.
Gibson reported net earnings of $ 25,852,000 for the year in which the error occurred, and its income tax rate was 39.3 percent.
Required:
1. Compute the amount of net earnings that Gibson reported after correcting the inventory error. Show computations.
2. Assume that the inventory error was not discovered. Identify the financial statement accounts that would have been incorrect for the year the error occurred and for the subsequent year. State whether each account was understated or overstated.