Danville Bottlers is a wholesale beverage company. Danville uses the FIFO inventory method to determine the cost of its . quantities are determined by a physical count. For the accounting yearend December 31, 2021, was originally determined to be $3,265,000. However, on January 17, 2022, John Howard, the company’s controller, discovered an error in the count. He determined that the correct amount should be $2,600,000. Danville is a privately owned with significant financing provided by a local bank. The bank requires annual audited as a condition of the loan. By January 17, the auditors had completed their review of the which are scheduled to be issued on January 25. They did not discover the inventory error.
John’s first reaction was to communicate his finding to the auditors and to revise the before they are issued. However, he knows that his and his fellow workers’ profit-sharing plans are based on annual pretax earnings, and he is uncertain what effect the error correction would have on pretax earnings.
Required:
1. What is the effect of the inventory error on pretax earnings?
2. How would correcting the error affect employee bonuses?
3. If the error is not corrected in the current year and is discovered by the auditors during the following year’s audit, how will it be reported in the company’s Discuss the ethical dilemma John Howard faces.
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