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Effects of inventory errors Following are condensed income statements for Uncle Bill's Home Improvement Center for the years ended December 31, 2014, and 2013:
2014
2013
Sales
$811,800
$785,400
Cost of goods sold
(606,900)
(540,600)
Gross pro?t
$204,900
$244,800
Operating expenses
(155,550)
(142,050)
Net income (ignoring income taxes)
$ 49,350
$102,750
Uncle Bill was concerned about the operating results for 2014 and asked his recently hired accountant, "If sales increased in 2014, why was net income less than half of what it was in 2013?" In February of 2015, Uncle Bill got his answer: "The ending inventory reported in 2013 was overstated by $35,250 for merchandise that we were holding on consignment on behalf of Kirk's Servistar. We still keep some of their appliances in stock, but the value of these items was not included in the 2014 inventory count because we don't own them."
a. Recast the 2013 and 2014 income statements to take into account the correction of the 2013 ending inventory error.
b. Calculate the combined net income for 2013 and 2014 before and after the correction of the error. Explain to Uncle Bill why the error was corrected in 2014 before it was actually discovered in 2015.
c. What effect, if any, will the error have on net income and stockholders' equity in 2015?
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