Horner Watch Compan) reported the following income statement data tor a 2-year period.

Horner uses a periodic inventory system. The inventories at January 1,2006, and December 31, 2007. are correct. However, the ending inventory at December 31, 2006, was overstated $3,000.
Instructions

(a) Prepare correct income statement data for the 2 years.

(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

(c) Explain in a letter to the president of Horner Company what has happened i.e., the nature of the error and its effect on the financial statements.

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2006 2007 Sales Cost of goods sold Beginning inventory $210,000 $250,000 32.000 44.000 Cost of goods purchased 173.000 202.000 Cost of goods available for sale 205.000 246,000 Ending inventory 44.000 52.000 Cost of goods sold 161.000 194.000 Gross profit $ 49,000 $ 56,000