Mertens Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $31,700, and its ending inventory on December 31 was understated by $16,300. In addition, a purchase of merchandise costing $20,700 was incorrectly recorded as a $2,070 purchase. None of these errors were discovered until the next year. As a result, taxable income for this year was:

The answer is, The taxable income for this year was Understated by $3,230

Explanation:

Solution

Particulars: Under statement of beginning inventory January 1.

Amount: 31700

The Effect on taxable income :Overstated

Particulars: Under statement of Ending inventory December 31

Amount: -16300

The Effect on taxable income: Understated

Particulars: Purchases of Incorrect record of  ($20700-$2070)

Amount: -18630

The Effect on taxable income: Understated

Particulars:Net Effect on taxable income for above transactions

Amount: -3230

The Effect on taxable income: Understated

Therefore, from the above information from the question stated, the taxable income for this year was Understated by $ 3,230