Question

On March 5, 2018, you were hired by Stellar Inc., a closely held company, 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.

Items
1.		Interest income of $14,200 was not accrued at the end of 2016. It was recorded when received in February 2017.
2.		A computer costing $4,000 was expensed when purchased on July 1, 2016. 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 $35,100 were incurred early in 2016. They were capitalized and were to be amortized over a 3-year period. Amortization of $11,700 was recorded for 2016 and $11,700 for 2017.
4.		On January 2, 2016, Stellar leased a building for 5 years at a monthly rental of $8,700. On that date, the company paid the following amounts, which were expensed when paid.

Security deposit		$21,300
First month’s rent		8,700
Last month’s rent		8,700
		$38,700

5.		The company received $39,300 from a customer at the beginning of 2016 for services that it is to perform evenly over a 3-year period beginning in 2016. None of the amount received was reported as unearned revenue at the end of 2016.
6.		Merchandise inventory costing $17,700 was in the warehouse at December 31, 2016, 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, 2016, and the retained earnings figure reported on the balance sheet at December 31, 2017. 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.

Answer 1

S.No. Particulars Impact on Net income of 2016 Calculation Impact on Retained earnings of 2017 Remarks 1 Interest income not accrued in 2016 14200 - No adjustment required in 2017 as it is recorded at the time of receipt totally 2 Purchase of computer to be capitalized and only depreciation to be charged off 3500 Expense to be written back : 4000 Less - Depreciation to be charged for 6 months : 500 2500 Expense to be written back : 4000 Less - Depreciation to be charged for 1 year 6 months : 1500 3 R&D Expense to be charged off fully and not capitalized as the future economic benefits is uncertain -23400 Total expense:35,100 Less: Already amortized :11,700 -11700 Total expense:35,100 Less: Already amortized (2016 and 2017) :23,400 4a Security deposit to be taken to assets and not to be expensed off 21300 21300 4b First month's rent - No adjustment required - No adjustment required 4c Last month's rent to be treated as advance and not to be expensed off 8700 8700 5 Unearned revenue to be recorded (ie. Reversed from the income statement) -26200 Total revenue: 39300 Less- Revenue to be recorded for 2016: 1/3*39300 = 13100 -13100 Total revenue: 39300 Less- Revenue to be recorded for 2016 and 2017: 2/3*39300 = 26200 6 Ending inventory omitted needs to be recorded to increase the revenue 17700 0 Since periodic inventory system is followed. The ending inventory of 2017 would have been acccounted based on the physical count as at the end of 2017 and so no adjustment is required to the retained earnings