During a year-end evaluation of the financial records of the Matthew Company for the year ended December 31, 2014, the following was discovered:
Inventory on January 1, 2014, was understated by $6,000.
Inventory on December 31, 2014, was understated by $18,000.
Rent of $20,000 collected in advance on December 29, 2014, was included in income for 2014.
A probable, reasonably estimated contingent liability of $30,000 was not recorded as of December 31, 2014.
Net income for 2014 (before any of the above items) was $250,000. The corrected net income, ignoring income taxes, for 2014 should be
A) $300,000
B) $208,000
C) $212,000
D) $218,000

Question

During a year-end evaluation of the financial records of the Matthew Company for the year ended December 31, 2014, the following was discovered: 
Inventory on January 1, 2014, was understated by $6,000.
Inventory on December 31, 2014, was understated by $18,000.
Rent of $20,000 collected in advance on December 29, 2014, was included in income for 2014.
A probable, reasonably estimated contingent liability of $30,000 was not recorded as of December 31, 2014.
Net income for 2014 (before any of the above items) was $250,000. The corrected net income, ignoring income taxes, for 2014 should be
A) $300,000
B) $208,000
C) $212,000
D) $218,000

Quizplus · Accepted Answer

The understatement of inventory on January 1, 2014, results in an overstatement of cost of goods sold and, therefore, an understatement of net income. The understatement of inventory on December 31, 2014, results in an understatement of cost of goods sold and, therefore, an overstatement of net income. The inclusion of rent collected in advance in income for 2014 results in an overstatement of income. The contingent liability of $30,000 should be recorded as a liability, which would result in a decrease in net income. The corrected net income is $250,000 (original net income) + $6,000 (understatement of inventory on January 1, 2014) - $18,000 (understatement of inventory on December 31, 2014) - $20,000 (rent collected in advance) - $30,000 (contingent liability) = $212,000.

During a Year-End Evaluation of the Financial Records of the Matthew