Question

The following inventory valuation errors have been discovered for Knox Corporation:

The 2015 year-end inventory was overstated by $23,000.
The 2016 year-end inventory was understated by $61,000.
The 2017 year-end inventory was understated by $17,000.
The reported income before taxes for Knox was:
Year: Income before Taxes:
2015 $138,000
2016 $254,000
2017 $168,000
Required:
Compute what income before taxes for 2015, 2016, and 2017 should have been after correcting for the errors.

Answer 1

Corrected Income before taxes are $115,000 (2015), $315,000 (2016) and $185,000 (2017)

Step-by-step explanation:

in the calculation of a company's income before tax, the Cost of Goods Sold (COGS) is done using the basic formulae by Adding Opening year inventory with Purchases and subtracting Ending year Inventory. In the case where Ending year inventory has been overstated, the COGS that has been calculated is understated which implies that the Income before tax has been overstated.

In the vice versa scenario, where Ending year inventory has been understated, the COGS that has been calculated is overstated which implies that the Income before tax has been understated. The calculation of the same is done below:

Year 2015

Income Before Tax (Previous) - Ending year Inventory = Income before Tax (Corrected)

138,000 - 23,000 = $115,000

Year 2016

Income Before Tax (Previous) + Ending year Inventory = Income before Tax (Corrected)

254,000 + 61,000 = $315,000

Year 2017

Income Before Tax (Previous) + Ending year Inventory = Income before Tax (Corrected)

168,000 + 17,000 = $185,000