Grants Corporation prepared the following two income statements (simplified for illustrative purposes):

First Quarter 2014Second Quarter 2014Sales revenue$12,500$19,600Cost of goods soldBeginning inventory$ 3,700$3,100Purchases2,80012,100Goods available for sale6,50015,200Ending inventory3,1009,500Cost of goods sold3,4005,700Gross profit9,10013,900Expenses4,7005,700Pretax income$4,400$8,200

During the third quarter, it was discovered that the ending inventory for the first quarter should have been $3,540.

Required:1.What effect did this error have on the combined pretax income of the two quarters?

Increase 440Decrease 440NE

2.Did this error affect the EPS amounts for each quarter?

YesNo

3.Prepare corrected income statements for each quarter.

4.Prepare the schedule with the following headings to reflect the comparative effects of the correct and incorrect amounts on the income statement.