E6-12 Staley Watch Company reported the following income statement data for a 2-

ACC 280 E6-12 Staley Watch Company reported the following income statement data for a 2-

 Principles of Accounting: Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial Accounting (6th ed.). Hoboken, NJ: Wiley.

Exercise 6-12 Staley Watch Company reported the following income statement data for a 2- year period.

2008 2009

Sales $210,000 $250,000

Cost of goods sold

Beginning inventory 32,000 44,000

Cost of goods purchased 173,000 202,000

Cost of goods available for sale 205,000 246,000

Ending inventory 44,000 52,000

Cost of goods sold 161,000 194,000

Gross profit $ 49,000 $ 56,000

Staley uses a periodic inventory system. The inventories at January 1, 2008, and December 31, 2009, are correct. However, the ending inventory at December 31, 2008, was overstated $5,000.

Instructions

(a) Prepare correct income statement data for the 2 years.

(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

(c) Explain in a letter to the president of Staley Company what has happened—i.e., the nature of the error and its effect on the financial statements.