Question

Vibrant Company had $1,040,000 of sales in each of Year 1, Year 2, and Year 3, and it purchased merchandise costing $570,000 in each of those years. It also maintained a $340,000 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 1 that caused its Year 1 ending inventory to appear on its statements as $320,000 rather than the correct $340,000. Required: 1. Determine the correct amount of the company’s gross profit in each of Year 1, Year 2, and Year 3. 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 Year 1, Year 2, and Year 3.

Answer 1

Answer:

Explanation:

1. The correct amount of the company’s gross profit in each of Year 1, Year 2, and Year 3. can be seen in the first attached image below

2. A Prepared comparative income statements that shows the effect of the error on the company's cost of goods sold and gross profit for each of Year 1, Year 2, and Year 3 can be seen in the second attached image below

Answer 2

Answer:

1)                                      YEAR 1           YEAR 2         YEAR 3

Gross Profit                   $470,000     $470,000     $470,000

2) Income Statement

                      Year 1            error              Year 2            error                

Sales            $1,040,000   $1,040,000     $1,040,000    $1,040,000

COGS         -$570,000    -$590,000      -$570,000     -$550,000

Gross profit $470,000     $450,000        $470,000     $490,000

There is no effect on year three

Explanation:

On year 1 the Error is on closing inventory when closing inventory decreases it results in higher Cost of sales and lower gross profits hence the increase and decrease of $20,000 in COGS and Gross profit respectively.

On year Two The Error is in Opening inventory, when opening inventory decreases it results in lower Cost of Sales and Higher gross profits hence the decrease and increase of $20,000 in COGS and Gross profit respectively.

                                           Year 1               Year 2              Year 3

Sales                                $1,040,000     $1,040,000       $1,040,000

Cost of sales                  -$570,000        -$570,000         -$570,000

Gross profit                    $470,000          $470,000          $470,000

calculations

opening inventory        $340,000

purchases                     $570,000

Available for sale          $910,000

minus closing                $340,000

Cost of Sales                 $570,000

2 )                                     Year 1

opening inventory        $340,000             $320,000        $340,000  

purchases                     $570,000              $570,000         $570,000

Available for sale          $910,000              $890,000         $910,000

minus closing                $320,000             $340,000         $340,000

Cost of Sales                 $590,000            $550,000         $570,000