Question

Following are condensed income statements for Uncle Bill's Home Improvement Center for the years ended December 31, 2017, and 2016:

  

	2017			2016
Sales	$	595,320		$	575,960
Cost of goods sold		(445,060	)		(396,440	)
Gross profit	$	150,260		$	179,520
Operating expenses		(114,070	)		(104,170	)
Net income (ignoring income taxes)	$	36,190		$	75,350

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 2016?" In February of 2018, Uncle Bill got his answer: "The ending inventory reported in 2016 was overstated by $25,850 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.

b-1. Calculate the combined net income for 2016 and 2017 before and after the correction of the error.

Answer 1

PARTICULARS	2017	2016
Sales	595,320.00	575,960.00
cost of goods sold(WN)	- 419,210.00	- 422,290.00
Gross profit	176,110.00	153,670.00
operating expenses	114,070.00	104,170.00
Net income	62,040.00	49,500.00
working note:-
cost of goods sold	445,060.00	396,440.00
Add:overstated closing stock of 2016		25,850.00
Less:overstated opening stock of 2017	-   25,850.00
corrected cost of goods sold	419,210.00	422,290.00
combined net income after	62040+49500
	111,540.00
combined net income before	36190+75350
	111,540.00