On March 5, 2021, you were hired by Sweet 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 2. Interest income of $13,400 was not accrued at the end of 2019. It was recorded when received in February 2020. A computer costing $3,680 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. Research and development costs of $34,200 were incurred early in 2019. They were capitalized and were to be amortized over a 3-year period. Amortization of $11,400 was recorded for 2019 and $11,400 for 2020. On January 2, 2019, Sweet leased a building for 5 years at a monthly rental of $8,800. On that date, the company paid the following amounts, which were expensed when paid. 4. Security deposit First month's rent Last month's rent $21,100 8,800 8,800 $38,700 5. The company received $32,700 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 $16,500 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. 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. 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 Understated Overstated Retained Earnings 12/31/20 Understated Overstated Item 1. $ 0 0 to 0 0 0 0 i 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
