Leslie Ltd has found an error in its revenue account: an invoice for $3000 was recorded as revenue in 2015 when it should have been recorded in 2016.The company's income tax rate is 40 per cent and there was no corresponding error in cost of goods sold.
-What is the effect of the error on 2016 net profit?
A) It is $1800 too low.
B) It is $3000 too low.
C) It is $1800 too high.
D) It is $3000 too high.

Question

Quizplus · Accepted Answer

Since the invoice was recorded as revenue in 2015, Leslie Ltd would have paid income tax on the $3000 at a rate of 40%. This means that the tax paid on the $3000 would have been $1200 ($3000 x 40%). As the invoice was mistakenly recorded in 2015, the company did not pay tax on the $3000 in 2016. Therefore, the net profit for 2016 would be $1800 lower ($3000 - $1200 = $1800).

Leslie Ltd Has Found an Error in Its Revenue Account