1. The preparation of the correct income statement for Vibrant Company for each of the three years is as follows:
Vibrant Company
Income Statement
For the years ended December 31, Year 1, Year 2, and Year 3
Year 1 Year 2 Year 3 Total
Sales revenue $920,000 $920,000 $920,000 $2,760,000
Cost of goods sold:
Beginning inventory $220,000 $220,000 $220,000 $220,000
Purchases 510,000 510,000 510,000 1,530,000
Goods available for sale $730,000 $730,000 $730,000 $1,750,000
Less Ending inventory $220,000 $220,000 $220,000 $220,000
Cost of goods sold 510,000 510,000 510,000 1,530,000
Gross profit $410,000 $410,000 $410,000 $1,230,000
2. The preparation of the income statements showing the effects of the error for Vibrant Company for each of the three years is as follows:
Vibrant Company
Income Statement
For the years ended December 31, Year 1, Year 2, and Year 3
Year 1 Year 2 Year 3 Total
Sales revenue $920,000 $920,000 $920,000 $2,760,000
Cost of goods sold:
Beginning inventory $220,000 $200,000 $220,000 $220,000
Purchases 510,000 510,000 510,000 1,530,000
Goods available for sale $730,000 $710,000 $730,000 $1,750,000
Less Ending inventory $200,000 $220,000 $220,000 $220,000
Cost of goods sold 530,000 490,000 510,000 1,530,000
Gross profit $390,000 $430,000 $410,000 $1,230,000
Thus, the misstatement of the ending inventory as $200,000 instead of $220,000 caused the gross profit for year 1 and year 2 to be correspondingly misstated by $20,000, respectively.
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