Response to the following problem:
Boswell Electric prepared the following condensed income statements for two successive years:
| |
|
2011 |
|
2010 |
| Sales |
$ |
3,000,000 |
$ |
2,950,000 |
| Cost of goods sold |
|
1,300,000 |
|
1,000,000 |
|
|
|
|
|
| Gross profit on sales |
$ |
1,700,000 |
$ |
1,950,000 |
| Operating expenses |
|
400,000 |
|
450,000 |
|
|
|
|
|
| Net income |
$ |
1,300,000 |
$ |
1,500,000 |
At the end of 2010 (right-hand column above), the inventory was understated by $27,000, 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 $670,000 at the end of 2010 and $665,000 at the end of 2011. (Boswell is organized as a 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. (Round your percentage answers to 2 decimal places. )
c. Which of the following statements is false?
Owner's equity at the end of 2011 should be increased by $27,000 to $697,000.
Owner's equity at the end of 2011 requires no correction.
Owner's equity at the end of 2010 should be increased by $27,000 to $697,000.