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Answer: a. $154,000 increase
Explanation:
An overstated closing inventory overstates Income as it understates Cost of Goods sold.
An overstated Depreciation understates Income as it overstates expenses.
2014 Income Overstatement (understatement) = 162,000 - 135,000
= $27,000
Net income overstated by $27,000 in 2014
An understated closing inventory understates Income as it overstates Cost of Goods sold.
An understated Depreciation overstates Income as it understates expenses.
2015 income overstatement (understatement) = 45,000 - 64,000
= -$19,000
Income understated in 2015 by $19,000
2015 Beginning inventory was $162,000 overstated which means income was understated by $162,000 in 2015.
Income should therefore be increased (decreased): Understatements - Overstatements
= 162,000 + 19,000 - 27,000
= $154,000
