Question

The Blossom Corporation is a calendar-year corporation. Its financial statements for the years 2021 and 2020...

The Blossom Corporation is a calendar-year corporation. Its financial statements for the years 2021 and 2020 contained errors as follows:

2021 Ending Inventory Overstated $9,000 Depreciation Expense Understated $6,000

2020 Ending Inventory Overstated $24,000 Depreciation Expense Overstated $18,000

Assume that the proper correcting entries were made at December 31, 2020. By how much will 2021 income before taxes be overstated or understated?

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Answer #1

As overstating depreciation will decrease the income therefore after correcting it will increase the profit. Also overstating the ending inventory will increase the profit therefore after correcting it will decrease the profit.

Year 2020

Depreciation expense overstaed by 18,000 and ending inventory by 24,000

Therefore profit will increase by 18,000 and decrease by 24,000 therefore net the profit will decrease by 6,000

Year 2021

As last year errors were corrected at end of the year 2020 therefore it will not affect this year.

Depreciation was understated by 6,000 and ending inventory was overstated by 9,000.

Therefore profit will decrease by 6,000 and also by 9,000. Therefore in total net profit will decrease by 15,000

Therefore total income tax will be understated by

= $15,000

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