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Hello,
I am sure you know this problem very well.
During 20X7 Global discovered that certain items had been included in inventory at 31 December 20X6, valued at $4.2 million, which had been in fact sold before the year end.
20X6 20×7(Draft)
(millions) (millions)
sales 47400 67200
cost of goods sold (34,570) (55800)
profit before tax 12830 11400
income taxes (3,880) (3400)
profit for the period 8950 8000Retained earnings at 1 January 20X7 were $13 million. The cost of goods sold for 20X7 includes the $4.2 million error in opening inventory. The income tax rate was 30% for 20X6 and 20X7.
Required : Show the income statement for 20X7, with 20X6 comparative.
My question is the following:
I do not understand why the income tax is deducted in 2006 from 3880 and why added in 2007 to 3400. Isn’t it that when we sell sth and have a revenue, we have an increase in the income tax because the received revenue is taxed? If yes, then why would we deduct 1260 from 3880 but not add? The same for 2007.
Thanks in advance.Should not the 2006 cost of sales been increased by the $4,200 thus reducing 2006 profits and 2006 tax by 30% x $4,200 = $1,260?
And a corresponding decrease in 2007 cost of sales, a resultant increase in 2007 profits and a resultant increase in 2007 tax by $1,260?
Does that answer you?
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