During the audit of Montane Company's 2019 financial statements,the auditors discovered that the 2019 ending inventory had been overstated by $8,000 and that the 2019 beginning inventory was overstated by $5,000.Before the effect of these errors,2019 pretax income had been computed as $100,000.What should be reported as the correct 2019 pretax income before taxes?

Question

Quizplus · Accepted Answer

To calculate the correct 2019 pretax income, we need to adjust for the inventory overstatements.

The overstatement of $8,000 in ending inventory means that the cost of goods sold was understated by $8,000. Similarly, the overstatement of $5,000 in beginning inventory means that the cost of goods sold was overstated by $5,000.

To adjust for these errors, we need to increase the cost of goods sold by $8,000 and decrease it by $5,000, resulting in a net increase of $3,000.

Therefore, the correct 2019 pretax income before taxes would be:

$100,000 (original income)
- $8,000 (overstatement of ending inventory)
+ $5,000 (overstatement of beginning inventory)
- $3,000 (adjustment for net effect of errors)

= $94,000

So, the correct answer is D) $97,000, which is the closest option to our calculated amount.

During the Audit of Montane Company's 2019 Financial Statements,the Auditors