Question

Rose Inc. reports gross profit as $200,000 in 20X1 and $260,000 in 20X2. However, an astute accountant discovers that mistakes were made in each year in determining ending inventory. At the end of 20X1, merchandise costing $18,000 was omitted from the year-end physical inventory count. At the end of 20X2, merchandise costing $7,000 was accidentally counted twice. What does the accountant believe the gross profit should be for 20X2?

A) $249,000

B) $235,000

C) $271,000

D) $285,000

Answer 1

Under stated ending inventory in year 2001 ( or under stated beginning inventory in year 2002) = $18,000

Over stated ending inventory in 2002 = $7,000

Incorrect gross profit of 2002 = $260,000

Correct gross profit of 2002 = Incorrect gross profit of 2002 - Over stated ending inventory in 2002 - Under stated ending inventory in year 2001

= 260,000-7,000-18,000

= $235,000

Hence, correct gross profit of 2002 should be $235,000.

Due to understated beginning inventory of $18,000 in 2002, cost of goods sold would have been lower and gross profit would have been higher by $18,000 must be subtracted from gross profit calculated to find out correct gross profit.

Due to over stated ending inventory of $7,000 in 2002, cost of good sold would have been lower and gross profit would have been higher by $7,000, hence to correct this $7,000 must be subtracted from gross profit calculated to find out correct gross profit.

Correct option is B.

Kindly comment if you need further assistance.

Thanks‼!