Question

The Jackson Company incorrectly omitted $100,000 of merchandise from its 20X1 ending inventory. In addition, a merchandise purchase of $40,000 was incorrectly recorded as a $4,000 debit to the purchases account. As a result of these errors, 20X1 before-tax income is:___________.1. Overstated by $136,0002. Understated by $136,0003. Overstated by $640004. Undersated by $64000

Answer 1

Answer:

4. understated by $64000

Explanation:

Purchase cost increases the cost of goods sold and reduces profit before tax (PBT) income.

Similarly, closing inventory balance increases profits before tax income.

In the given case, purchase cost is understated by $40,000 less $4000 i.e $36000. This would overstate the profits by $ 36000. Whereas, omission of closing inventory from records of $100,000 would understate profits by $100,000.

Thus, the net effect of the two mentioned omissions and errors would lead to understated profits by $100,000 less $36000 i.e by $64,000.