On May 5, 2018, you were hired by Gavin Inc., a closely held company that follows ASPE,

Question:

On May 5, 2018, you were hired by Gavin Inc., a closely held company that follows ASPE, as a staff member of its newly created internal auditing department. While reviewing the company's records for 2016 and 2017, you discover that no adjustments have yet been made for the items listed below.
1. Interest income of $18,800 was not accrued at the end of 2016. It was recorded when received in February 2017.
2. Equipment costing $18,000 was expensed when purchased on July 1, 2016. It is expected to have a four-year life with no residual value. The company typically uses straight-line depreciation for all fixed assets.
3. Research costs of $36,000 were incurred early in 2016. They were capitalized and were to be amortized over a three-year period. Amortization of $12,000 was recorded for 2016 and $12,000 for 2017. For tax purposes, the research costs were expensed as incurred.
4. On January 2, 2016, Gavin leased a building for five years at a monthly rental of $9,000. On that date, Gavin paid the following amounts, which were expensed when paid for both financial reporting and tax purposes:
Security deposit ....................... $35,000
First month's rent ........................ 9,000
Last month's rent ........................ 9,000
............................................ $53,000
5. The company received $42,000 from a customer at the beginning of 2016 for services that it is to perform evenly over a three-year period beginning in 2016. None of the amount received was reported as unearned revenue at the end of 2016. The $42,000 was included in taxable income in 2016.
6. Merchandise inventory costing $16,800 was in the warehouse on December 31, 2016, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.
Gavin follows the taxes payable method of accounting for income taxes.
Instructions
Using the table that follows, enter the appropriate dollar amounts in the appropriate columns to indicate the effect of any errors on the net income figure reported on the income statement for the year ending December 31, 2016, and the retained earnings figure reported on the statement of financial position at December 31, 2017. Assume that all amounts are material and that an income tax rate of 25% is appropriate for all years. Assume also that each item is independent of the other items. It is not necessary to total the columns on the grid.