On March 5, 2013, 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 2011 and 2012, you discover that no adjustments have yet been made for the items listed below.

Items
  1. Interest income of $14,100 was not accrued at the end of 2011. It was recorded when received in February 2012.

  2. A computer costing $4,000 was expensed when purchased on July 1, 2011. 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 2011. They were capitalized and were to be amortized over a 3-year period. Amortization of $11,000 was recorded for 2011 and $11,000 for 2012.
  4. On January 2, 2011, 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 2011 for services that it is to perform evenly over a 3-year period beginning in 2011. None of the amount received was reported as unearned revenue at the end of 2011.
  6. Merchandise inventory costing $18,200 was in the warehouse at December 31, 2011, 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, 2011, and the retained earnings figure reported on the balance sheet at December 31, 2012. 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.