Adjusting profit for inventory and prepaid rent errors

Steps:

• Start with calculated profit of $2400.
• Closing inventory understated by $1500 overstates cost of goods sold by$1500 (COGS = opening inventory + purchases – closing inventory), understating profit by $1500.
• Add $1500 to correct profit:$2400 + $1500 =$3900.
• Rent prepaid understated by $1000 is a balance sheet asset error with no impact on current-year profit.

Why D is correct:

• $3900 reflects the adjustment to closing inventory in the COGS formula, increasing profit by the understatement amount.

Why the others are wrong:

• A. $2500 under-adjusts by only$100, ignoring full inventory error.
• B. $2700 under-adjusts by$300, using incorrect correction amount.
• C. $2800 under-adjusts by$400, failing to apply full $1500 inventory fix.

Final answer: D