Question

On July 1, the Company announced that it had determined that the inventory . . . had been overstated. . . . The overstatement of inventory . . . was $8,766,000.

Montgomery Greeting Cards reported an incorrect net income amount of $25,922,000 for the year in which the error occurred and the income tax rate was 35.50 percent.

Answer 1

Overstatement of inventory = 8766000

Incorrect net income = 25922000

Overstatement of inventory will increase gross profit of the company.

Corrected net income = Incorrect net income - Overstatement of inventory

= 25922000 - 8766000 = 17156000

Correct income tax = 17156000*35.5% = 6090380

Income tax charged earlier on incorrect profit = 25922000*35.5% = 9202310

Income tax to be reversed because of overstatement of inventory = 8766000*0.355 or 9202310 - 6090380 = 3111930