Question

Vibrant Company had $970,000 of sales in each of three consecutive years 2016–2018, and it purchased merchandise costing $535,000 in each of those years. It also maintained a $270,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of year 2016 that caused its year-end 2016 inventory to appear on its statements as $250,000 rather than the correct $270,000.

1. Determine the correct amount of the company’s gross profit in each of the years 2016–2018.
2. Prepare comparative income statements to show the effect of this error on the company's cost of goods sold and gross profit for each of the years 2016−2018.

Answer 1

Step-by-step explanation:

From the give information; we are to:

1. Determine the correct amount of the company’s gross profit in each of the years 2016–2018.

The correct amount of the company's gross profit in each of the years 2016 - 2018 can be seen as computed in the table below.

VIbrant Company Income statement

2016 2017 2018

Sales 970,000 970,000 970,000

-

Cost of good

sold:

Beginning 270,000 270,000 270,000

Inventory

+

Purchase 535,000 535,000 535,000

The cost of good

available for sale 805000 805000 805000

is:

-

Ending Inventory 270,000 270,000 270,000

Cost of good sold 535,000 535,000 535,000

Gross Profit 435 000 435000 435000

N:B ;

Gross Profit = Sales - Cost of good sold

Gross Profit = 970000- 535000

Gross Profit = 435000

2. Prepare comparative income statements to show the effect of this error on the company's cost of goods sold and gross profit for each of the years 2016−2018.

For 2016; the comparative income statement is computed as follows:

Debit Credit

Sales 970000

Less:(-)

Cost of good sold

Beginning Inventory 270000

Add Purchase 535000

Cost of goods available 805000

for sale

Less (-)

Ending Inventory 250000

Cost of good sold 555000

Gross profit 415000

For 2017; the comparative income statement is computed as follows:

Debit Credit

Sales 970000

Less:(-)

Cost of good sold

Beginning Inventory 250000

Add Purchase 535000

Cost of goods available 785000

for sale

Less (-)

Ending Inventory 270000

Cost of good sold 515000

Gross profit 455000

For 2018; the comparative income statement is computed as follows:

Debit Credit

Sales 970000

Less:(-)

Cost of good sold

Beginning Inventory 270000

Add Purchase 535000

Cost of goods available 805000

for sale

Less (-)

Ending Inventory 270000

Cost of good sold 535000

Gross profit 435000