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condensed income statements for Uncle Bill's Home Improvement Center for the years ended December 31, 2017, and 2016: Sales Cost of goods sold Gross profit Operating expenses Net income (ignoring income taxes) 2017 $ 405,100 (303,000) $ 102,100 (78,400) $ 23,700 2016 $ 393,200 (270
condensed income statements for Uncle Bill's Home Improvement Center for the years ended December 31, 2017, and 2016: Sales Cost of goods sold Gross profit Operating expenses Net income (ignoring income taxes) 2017 $ 405,100 (303,000) $ 102,100 (78,400) $ 23,700 2016 $ 393,200 (270.000) $ 123,200 (71,800) $ 51,400 Uncle Bill was concerned about the operating results for 2017 and asked his recently hired accountant, "If sales increased in 2017, why was net income less than half of what it was in 20167" In February of 2018, Uncle Bill got his answer: "The ending inventory reported in 2016 was overstated by $17,500 for merchandise that we were holding on consignment on behalf of Kirk's Servistar. We still keep some of their appliances in stock, but the value of these items was not included in the 2017 inventory count because we don't own them." Required: a. Recast the 2016 and 2017 income statements to take into account the correction of the 2016 ending inventory error. 2017 405,100 2016 393,200 $ $ Sales Cost of goods sold Gross profit Operating expenses Net income (ignoring income taxes) b-1. Calculate the combined net income for 2016 and 2017 before and after the correction of the error. Total Combined Net Income Before correction of error 2017 2016 $ 23,700 $ 51,400 After correction of error
b-2. The error was corrected in 2017 before it was actually discovered in 2018. True False c. Is there any effect on net income and stockholders' equity in 2018 due to the error?
Expert Solution
Since Ending inventory of 2016 was overstated, hence beginning inventory of 2017 is also overstated.
So Cost of goods sold of 2016 is at decreased value. hence in order to correct this, $17500 has to be added in Cost of goods sold of 2016.
Similarly Cost of goods sold of 2017 is at increased value so it should be reduced by $17500.
a
| 2017 | 2016 | |
| Sales | $405,100 | $393,200 |
| Cost of goods sold | (285,500) | (287,500) |
| gross profit | $ 119,600 | $ 105,700 |
| Operating Expenses | (78,400) | (71,800) |
| Net Income | $ 41,200 | $ 33,900 |
b-1
| Combined Net Income | Total | 2017 | 2016 |
| Before correction of error | 75,100 | $ 23,700 | $ 51,400 |
| After correction of error | 75,100 | $ 41,200 | $ 33,900 |
b-2 True, The error was corrected in 2017 before it was actually discovered in 2018.
b-3 No, there is no effect in income and stockholders' equity because the net income will remain same .
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