On March 5, 2021, you were hired by Hemingway Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company's records for 2019 and 2020, you discover that no adjustments have yet been made for the following items. Items 1. Interest income of $14,100 was not accrued at the end of 2019. It was recorded when received in February 2020. 2. A computer costing $4,000 was expensed when purchased on July 1, 2019. It is expected to have a 4-year life with no salvage value. The company typically uses straight-line depreciation for all fixed assets. 3. Research and development costs of $33,000 were incurred early in 2019. They were capitalized and were to be amortized over a 3-year period. Amortization of $11,000 was recorded for 2019 and $11,000 for 2020. 4. On January 2, 2019, Hemingway leased a building for 5 years at a monthly rental of $8,000. On that date, the company paid the following amounts, which were expensed when paid. Security deposit $20,000 First month's rent 8,000 Last month's rent 8,000   $36,000 5. The company received $36,000 from a customer at the beginning of 2019 for services that it is to perform evenly over a 3-year period beginning in 2019. None of the amount received was reported as unearned revenue at the end of 2019. 6. Merchandise inventory costing $18,200 was in the warehouse at December 31, 2019, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method. Instructions Indicate the effect of any errors on the net income figure reported on the income statement for the year ending December 31, 2019, and the retained earnings figure reported on the balance sheet at December 31, 2020. Assume all amounts are material, and ignore income tax effects. Using the following format, enter the appropriate dollar amounts in the appropriate columns. Consider each item independent of the other items. It is not necessary to total the columns on the grid.   Net Income for 2019 Retained Earnings at 12/31/20 Item Understated Overstated Understated Overstated

Question

On March 5, 2021, you were hired by Hemingway Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company's records for 2019 and 2020, you discover that no adjustments have yet been made for the following items.

Items

  • 1. Interest income of $14,100 was not accrued at the end of 2019. It was recorded when received in February 2020.
  • 2. A computer costing $4,000 was expensed when purchased on July 1, 2019. It is expected to have a 4-year life with no salvage value. The company typically uses straight-line depreciation for all fixed assets.
  • 3. Research and development costs of $33,000 were incurred early in 2019. They were capitalized and were to be amortized over a 3-year period. Amortization of $11,000 was recorded for 2019 and $11,000 for 2020.
  • 4. On January 2, 2019, Hemingway leased a building for 5 years at a monthly rental of $8,000. On that date, the company paid the following amounts, which were expensed when paid.
    Security deposit
    $20,000
    First month's rent
    8,000
    Last month's rent
    8,000
     
    $36,000
  • 5. The company received $36,000 from a customer at the beginning of 2019 for services that it is to perform evenly over a 3-year period beginning in 2019. None of the amount received was reported as unearned revenue at the end of 2019.
  • 6. Merchandise inventory costing $18,200 was in the warehouse at December 31, 2019, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.

Instructions

Indicate the effect of any errors on the net income figure reported on the income statement for the year ending December 31, 2019, and the retained earnings figure reported on the balance sheet at December 31, 2020. Assume all amounts are material, and ignore income tax effects. Using the following format, enter the appropriate dollar amounts in the appropriate columns. Consider each item independent of the other items. It is not necessary to total the columns on the grid.

 
Net Income for 2019
Retained Earnings at 12/31/20
Item
Understated
Overstated
Understated
Overstated
 
 
 
 
 

 

Expert Answer

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Tagged in
Business
Accounting

Related Accounting Q&A

Find answers to questions asked by students like you.

Q: Wardell Company purchased a mini computer on January 1, 2014, at a cost of $40,000. The computer has...

A: 1.Prepare adjusting entries: 

Q: The FASB requires a reconciliation between the effective tax rate and the federal government's statu...

A: Effective tax rate: The average rate of tax paid by individual or corporation on the income earned i...

Q: Strategic analysis of operating income (continuation of 12-21). Refer to Exercise 12-21. Calculate ...

A: 1. 

Q: Should gains and losses on a fair value hedge be recorded as they occur, or should they be recorded ...

A:  

Q: In 2016, Adonis Industries changed its method of valuing inventory from the average cost method to t...

A: Calculate the changes in inventory value.

Q: Hanmi Financial Corporation is the parent company of Hanmi Bank. The company’s stock split was annou...

A: Stock Splits: It is a method of increasing the total number of outstanding shares thereby, reducing ...

Q: S operates in a business environment with a 6% state sales tax rate and a 4% county sales tax rate. ...

A: Prepare the journal entries to reflect the sales tax that will remit to the state and to the county.

Q: Describe the usefulness and format of the statement of cash flows.

A: Statement of cash flows:Statement of cash flow is a financial statement that shows the cash and cash...

Q: Balanced scorecard, environmental, and social performance. Gardini Chocolates makes custom-labeled, ...

A: Requirement 1:Identify whether the strategies in 2017 are implemented successfully.No, the strategy ...

Q: Parsons Inc. has proposed a change from one inventory accounting method to another for financial rep...

A: Accounting changes: Accounting changes can be defined as changes in accounting principles, accountin...

Q: Cost-plus, time and materials, ethics. C & S Mechanical sells and services plumbing, heating, an...

A: Cost-plus pricing is a pricing mechanism where a certain % of mark-up value is added to the cost of ...

Q: Cullen Construction Company, which began operations in 2020, changed from the completed-contract to ...

A: (a)Calculate amount of net income that would be reported in 2021:Net income = Income before income t...

Q: Journalizing a large stock dividend Nelly, Inc. had 320,000 shares of $2 par value common stock issu...

A: The declaration of stock dividend will increase the dividend payable liability and decrease the reta...

Q: Describe techniques of comparative analysis

A: Comparative analysis of a financial statement helps the potential investors and stakeholders to anal...

Q: Peter Henning Tool Company's December 31 year-end financial statements contained the following error...

A: Click to see the answer

Q: Lena Kay and Kathy Lauder have a patent on a new line of cosmetics. They need additional capital to ...

A: 1.Journalize the issuance of common stock to Kay and Lauder. 

Q: Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Fr...

A: a.The ethical issues are the honesty and integrity of Frost Corporation's financial reporting practi...

Q: Help with G and H

A: (g) Calculate the balance in the Finished Goods Inventory account at the end of the month.

Q: What is a reverse stock split? What would be the effect of a reverse stock split on one million $1 p...

A:  

Q: What does the statement of stockholders’ equity report? How does the statement of stockholders’ equi...

A: A financial statement is the complete record of financial transactions that take place in a company ...

Q: ICOT Industries issued 15 million of its $1 par common shares for $424 million on April 11. Legal, p...

A: 1.

Q: Distinguish between ratio analysis and percentage analysis relative to the interpretation of financi...

A: Financial statement: A record of financial activities and financial position of the company or an in...

Q: Broussard Company reported net income of $3.5 million in 2020. Depreciation for the year was $520,00...

A: A Cash flow statement is a financial statement that provides the summarised information regarding ca...

Q: Define a change in estimate and provide an illustration.When is a change in accounting estimate effe...

A: Meaning:

Q: When DeSoto Water Works purchased a machine at the end of 2015 at a cost of $65,000, the company deb...

A: Click to see the answer

Q: Using IFRS, a change in accounting policy for which a standard does not include specific transitiona...

A: IFRS: International Financial Reporting Standard is abbreviated as IFRS. The IFRS is set up to bring...

Q: Target operating income, value-added costs, service company. Calvert Associates prepares architectur...

A: Requirement 1:Calculate the operating income; value added cost and total non-value added cost.

Q: Cost-plus, target return on investment pricing. Sweet Tastings makes candy bars for vending machines...

A: 1. Compute target operating income on total capital investment as shown below:

Q: Winston Corporation has 9,000 shares of 4%, $10 par cumulative preferred stock and 47,000 shares of ...

A: Dividends: This is the amount of cash distributed to stockholders by a company out its earnings, acc...

Q: Whittier Construction Co. had followed the practice ofexpensing all materials assigned to a construc...

A: Financial statements: Financial statements are condensed summary of transactions communicated in the...

Q: During its first year of operations, Eastern Data Links Corporation entered into the following trans...

A: Click to see the answer

Q: Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2016....

A: Prepare amortization schedule for the lessee-Company EL.

Q: During its first year of operations, the McCollum Corporation entered into the following transaction...

A: Journal entry for issue of shares:

Q: Customer-cost hierarchy, customer profitability. Louise Newman operates Interiors by Louise, an inte...

A: Customer Cost Hierarchy:Customer cost hierarchy is a method that helps in the categorization of cost...

Q: Why is it necessary to convert accrual-based net income to a cash basis when preparing a statement o...

A: Click to see the answer

Q: The Canliss Milling Company purchased machinery on January 2, 2014, for $800,000. A five-year life w...

A: Requirement 1: The accounting changes in comparative financial statements: The depreciation changes ...

Q: Hello! I need help with this problem. The first one is good, but the rest are wrong. Thank you for h...

A: Requirement 1: Compute the taxable income and after tax income of Kirsten.

Q: At the end of the current period, Agler Inc. had aprojected benefit obligation of $400,000 and pensi...

A: Pension: A fixed sum of money, receivable in future or after the age of retirement, which the benefi...

Q: What are the accounting problems related to the presentation of interim data?

A: Interim data is the data which covers a period less than the fiscal year.  The data is issued during...

Q: Analyzing and journalizing bond transactions On January 1, 2018, the Doctors Credit Union (DCU) issu...

A: Requirement 1:If the market interest rate is 5% when DCU issues its 7% bonds, the bonds will be pric...