Problem - Boswell Electric prepared the following condensed income statements for two successive years:
2011 2010
Sales................................................ $2,000,000 $1,500,000
Cost of good sold............................. 1,250,000 900,000
Gross profit on sales........................ $ 750,000 $ 600,000
Operating expenses......................... 400,000 350,000
Net income....................................... $ 350,000 $ 250,000
At the end of 2010 (right-hand column above), the inventory was understated by $40,000, but the error was not discovered until after the accounts had been closed and financial statements prepared at the end of 2011. The balance sheets for the two years showed owner's equity of $500,000 at the end of 2010 and $580,000 at the end of 2011. (Boswell is organized as sole proprietorship and does not incur income taxes expense.)
a. Compute the corrected net income figures for 2010 and 2011.
b. Compute the gross profit amounts and the gross profit percentages for each year on the basis of corrected data.
c. What correction, if any, should be made in the amounts of the company's owner's equity at the end of 2010 and at the end of 2011?