During the audit of Montane Company's 2019 financial statements,the auditors discovered that the 2019 ending inventory had been overstated by $8,000 and that the 2019 beginning inventory was overstated by $5,000.Before the effect of these errors,2019 pretax income had been computed as $100,000.What should be reported as the correct 2019 pretax income before taxes?

A) $113,000.
B) $87,000.
C) $105,000.
D) $97,000.

Question

Naaman Roberson · Accepted Answer

Final Answer : D, Explanation :  To calculate the correct 2019 pretax income, we need to adjust for the inventory overstatements.The overstatement of $8,000 in ending inventory means that the cost of goods sold was understated by $8,000. Similarly, the overstatement of $5,000 in beginning inventory means that the cost of goods sold was overstated by $5,000.To adjust for these errors, we need to increase the cost of goods sold by $8,000 and decrease it by $5,000, resulting in a net increase of $3,000.Therefore, the correct 2019 pretax income before taxes would be:$100,000 (original income)- $8,000 (overstatement of ending inventory)+ $5,000 (overstatement of beginning inventory)- $3,000 (adjustment for net effect of errors)= $94,000So, the correct answer is D) $97,000, which is the closest option to our calculated amount.

Definitions

Learning Objectives

Learning Objectives

Related questions