Inventory Errors (Alternate is 7-66.) The following data are from the 20X1 income statement of the Persian Rug Emporium ($ in thousands): Sales Deduct cost of goods sold Beginning inventory Purchases Cost of goods available for sale Deduct: Ending inventory Cost of goods sold Gross profit Other expenses $1,650 $ 390 820 $1,210 370 840 $810 610 Income before income taxes Income tax expense at 40% Net income $ 200 80 $ 120 The ending inventory was overstated by $15,000 because of errors in the physical count. The income tax rate was 40% in 20X1 and 20X2. 1. Which items in the income statement are incorrect and by how much? Use O for overstated, U for understated, and N for not affected. Complete the following tabulation:

20X1 Z 20X2 0 $15 Beginning inventory N Ending inventory ? ? Cost of goods sold ? ? Gross margin ? ? Income before income taxes ? ? Income tax expense ? ? Net income ? 2. What is the dollar effect of the inventory error on retained earnings at the end of 20X1 and at the end of 20X2?