Vibrant Company had $970,000 of sales in each of three consecutive years 2016–2018, and it purchased merchandise costing $535,000 in each of those years. It also maintained a $270,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of year 2016 that caused its year-end 2016 inventory to appear on its statements as $250,000 rather than the correct $270,000. 1. Determine the correct amount of the company’s gross profit in each of the years 2016–2018.
2. Prepare comparative income statements to show the effect of this error on the company's cost of goods sold and gross profit for each of the years 2016−2018.

Explanation:

From the give information; we are to:

1. Determine the correct amount of the company’s gross profit in each of the years 2016–2018.

The correct amount of the company's gross profit in each of the years 2016 - 2018 can be seen as computed in the table below.

                     VIbrant Company Income statement

                             2016                      2017                    2018

Sales                   970,000                970,000              970,000

-

Cost of good  

sold:                  

Beginning           270,000                270,000               270,000        

Inventory

+

Purchase             535,000               535,000               535,000      

The cost of good

available for sale   805000                 805000                 805000  

is:                      

-

Ending Inventory    270,000                270,000               270,000      

Cost of good sold   535,000               535,000               535,000

Gross Profit              435 000               435000                435000      

N:B ;

Gross Profit = Sales - Cost of good sold

Gross Profit = 970000- 535000

Gross Profit = 435000

2. Prepare comparative income statements to show the effect of this error on the company's cost of goods sold and gross profit for each of the years 2016−2018.

For 2016; the comparative income statement is computed as follows:

                                        Debit           Credit

Sales                                                   970000

Less:(-)

Cost of good sold

Beginning Inventory       270000

Add Purchase                 535000

Cost of goods available  805000

for sale

Less (-)

Ending Inventory              250000

Cost of good sold                               555000

Gross profit                                          415000

For 2017; the comparative income statement is computed as follows:

                                        Debit           Credit

Sales                                                   970000

Less:(-)

Cost of good sold

Beginning Inventory       250000

Add Purchase                 535000

Cost of goods available  785000

for sale

Less (-)

Ending Inventory              270000

Cost of good sold                               515000

Gross profit                                          455000

For 2018; the comparative income statement is computed as follows:

                                        Debit           Credit

Sales                                                   970000

Less:(-)

Cost of good sold

Beginning Inventory       270000

Add Purchase                 535000

Cost of goods available  805000

for sale

Less (-)

Ending Inventory              270000

Cost of good sold                               535000

Gross profit                                          435000