Reference no: EM133051012
PROBLEM - You audited the financial statements of Zendaya Corp. for the first time in 2019. The company started its operation in early 2017. Upon investigation, you discovered the following information:
a. The company reported the net income at P104,000, P140,000 and P160,000 in 2017, 2018 and 2019, respectively.
b. The company consistently omitted the following:
|
|
2017
|
2018
|
2019
|
|
Prepaid insurance
|
P2,000
|
P4,000
|
P6,000
|
|
Accrued salaries
|
7,500
|
6,200
|
8,300
|
|
Unearned rent
|
5,000
|
6,000
|
7,000
|
c. Deliveries of merchandise to customers at December 31 of each year end were recorded as sales upon collection the following year. The corresponding sales prices of the said deliveries were, P15,000, P12,000 and P14,000 in 2017, 2018 and 2019, respectively.
d. Inventory counts were conducted on December 31 of each year before any deliveries and receipts were made on the said date. Sales were made consistently at a gross profit of 40% of sales.
e. Purchases in transit at each year end amounted to P5,000 and P7,000 in 2018 and 2019, respectively. These were recorded as purchases upon receipt of the corresponding invoices in December.
f. The company incurred pre-operating and organization costs totaling to P80,000 in early 2017 which it had capitalized as an intangible asset and amortized over five years.
g. Improvements were made and completed early in 2017 on the leased office space costing P100,000 which it had capitalized to a leasehold improvements account and depreciated over its life which was ten years. The term of the non-cancellable lease however is five years without a renewal option.
Required - Based on the above and the result of the audit, answer the following:
What is the correct net income in 2017?
What is the retroactive adjustment to its 2019 beginning retained earnings?
What is the correct net income in 2019?
What is the effect of the errors to the 2018 working capital?
If the errors remained uncorrected by the end of 2019, what is the effect of errors to the 2019 ending retained earnings?