Use the information below to answer the following questions:
Leslie Ltd has found an error in its revenue account: an invoice for $3000 was recorded as revenue in 2011 when it should have been recorded in 2012. The company’s income tax rate is 40% and there was no corresponding error in cost of goods sold.
-What is the effect of the error on 2012 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

The error caused 2011 revenue to be overstated by $3000, and 2012 revenue to be understated by $3000. The net profit for 2012 is understated by $3000, but after accounting for the 40% tax rate, the net effect on net profit is $3000 * (1 - 0.40) = $1800 too low.

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