Use the following information to solve the following questions:
Shanti Inc. is a calendar-year corporation. Its financial statements for the years 2020 and 2019 contained errors as follows:
$$\begin{array} { l l l }
&2020&2019\
\text { Ending inventory } & \$ 6,000 \text { overstated } & \$ 16,000 \text { overstated } \
\text { Depreciation experse } & \$ 4,000 \text { understated } & \$ 12,000 \text { overstated }
\end{array}$$
-Assume that the proper correcting entries were made at December 31, 2019. By how much will 2020 income before taxes be overstated or understated?
A) $2,000 understated
B) $2,000 overstated
C) $4,000 overstated
D) $10,000 overstated

Question

Use the following information to solve the following questions:
Shanti Inc. is a calendar-year corporation. Its financial statements for the years 2020 and 2019 contained errors as follows:
 $$\begin{array} { l l l } 
&2020&2019\
\text { Ending inventory } & \$ 6,000 \text { overstated } & \$ 16,000 \text { overstated } \
\text { Depreciation experse } & \$ 4,000 \text { understated } & \$ 12,000 \text { overstated }
\end{array}$$
-Assume that the proper correcting entries were made at December 31, 2019. By how much will 2020 income before taxes be overstated or understated?
A) $2,000 understated
B) $2,000 overstated
C) $4,000 overstated
D) $10,000 overstated

Quizplus · Accepted Answer

The 2020 income before taxes will be overstated by $2,000. This is because the ending inventory for 2020 is overstated by $6,000, which would cause the cost of goods sold to be understated by the same amount, overstating income. However, the depreciation expense is understated by $4,000, which would understate income. The net effect is an overstatement of income by $2,000 ($6,000 - $4,000). The corrections made at the end of 2019 do not affect the 2020 calculations directly, as the question assumes proper corrections were already made for 2019 errors.

Use the Following Information to Solve the Following Questions: Shanti

Use the Following Information to Solve the Following Questions:
Shanti