On March 5, 2015, you were hired by Hemingway Inc., a closely held company, as a staff

Question:

On March 5, 2015, 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 2013 and 2014, you discover that no adjustments have yet been made for the items listed on the next page.
Items
1. Interest income of $14,100 was not accrued at the end of 2013. It was recorded when received in February 2014.
2. A computer costing $4,000 was expensed when purchased on July 1, 2013. It is expected to have a 4-year life with no . The company typically uses straight-line depreciation for all fixed assets.
3. Research and development costs of $33,000 were incurred early in 2013. They were capitalized and were to be amortized over a 3-year period. Amortization of $11,000 was recorded for 2013 and $11,000 for 2014.
4. On January 2, 2013, 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 2013 for services that it is to perform evenly over a 3-year period beginning in 2013. None of the amount received was reported as unearned revenue at the end of 2013.
6. Merchandise inventory costing $18,200 was in the warehouse at December 31, 2013, 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, 2013, and the retained earnings figure reported on the at December 31, 2014. 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 2013 Retained Earnings at 12/31/14 Item Understated Overstated Understated Overstated

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