Drafting Supplies Ltd

Essay

Drafting Supplies Ltd. sells its merchandise at a mark-up of 40 percent on cost. Near the end of 2012, it recorded a credit sale amounting to $7,000. Although this merchandise was not shipped, it was excluded from the December 31, 2012, periodic inventory. The auditor later determined that the sale was incorrectly recorded in 2012; it should have been recorded in 2013. The company uses 1 percent of credit sales as the amount to record for bad debt expense. Ignoring income taxes, the effect of this error was to (answer only one): Overstate 2012 income by $__________________________ or
Understate 2012 income by $________________________.