Hudson Inc. reported pretax income of $40,000 during 2018. The pretax income of Hudson Inc. was determined without knowledge of the errors indicated (assume periodic inventory method).

Year 2018 Ending inventory $9,000 understated

Year 2017 ending inventory $14,000 understated

Required:

1. What is the correct pretax income for 2018?

a. $49,000

b. $54,000

c. $63,000

d. $35,000

e. $17,000

f. $45,000

35,000

Explanation:

Given:

2018 ending inventory understated = 9,000

2017 ending inventory understated = 14,000

Pretax income = $40,000

Computation:

We know that ending inventory 2017 is opening inventory of 2018 so, we say that Opening inventory of 2018 understated by $14,000.

According to rules, Opening inventory understated, overstated the profit and ending inventory understated, understated the profit.

2018 ending inventory understated will be added into profit and 2017 ending inventory understated will subtract from the profit.

Profit during the year = $40,000 + $9,000 - $14,000

Profit during the year = $35,000