Your answer is incorrect.

On May 5, 2021, 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 companys records for 2019 and 2020, you discover that no adjustments have yet been made for the items listed below.

1.

Interest income of $19,552 was not accrued at the end of 2019. It was recorded when received in February 2020.

2.

Equipment costing $18,720 was expensed when purchased on July 1, 2019. 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 $37,440 were incurred early in 2019. They were capitalized and were to be amortized over a three-year period. Amortization of $12,480 was recorded for 2019 and $12,480 for 2020. For tax purposes, the research costs were expensed as incurred.

4.

On January 2, 2019, Gavin leased a building for five years at a monthly rental of $9,360. On that date, Gavin paid the following amounts, which were expensed when paid for both financial reporting and tax purposes:

Security deposit		$36,400
First months rent		9,360
Last months rent		9,360
		$55,120

5.

The company received $43,680 from a customer at the beginning of 2019 for services that it is to perform evenly over a three-year period beginning in 2019. None of the amount received was reported as unearned revenue at the end of 2019. The $43,680 was included in taxable income in 2019.

6.

Merchandise inventory costing $17,472 was in the warehouse on December 31, 2019, 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. 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 ended December 31, 2019, and the retained earnings figure reported on the statement of financial position at December 31, 2020. 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. (Do not leave any answer field blank. Enter 0 for amounts. Round answers to 0 decimal places, e.g. 5,125.)

		Net Income for 2019				Retained Earnings at Dec. 31, 2020
Item		Understated		Overstated		Understated		Overstated
1.		$		$		$		$
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