Assume that at the end of 20X1, a company’s ending inventory balance is overstated by $3,000. If the company has a 20% average tax rate, how will its income statement and balance sheet be affected in 20X1?

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Assume that at the end of 20X1, a company’s ending inventory balance is overstated by $3,000. If the company has a 20% average tax rate, how will its income statement and balance sheet be affected in 20X1?

20X1:

– BI: n/e
– NP: n/e
– EI: overstated by $3K
– COGS: understated by 3K
– GP: overstated by $3K
– Income Tax Exp.: overstated by $600 ($3K x 0.2)
– NI: overstated by $2.4K ($3K – 600)
– Cash: n/e
– Inventory: overstated by $3K
– Income Tax Payable: overstated by $600
– RE: overstated by $2.4K

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