Reference no: EM132631458

You have been assigned to audit the financial statements of Light Company for the year ended December 31, 2020. You discover the following situations.

1. Interest income of P42,300 was not accrued at the end of 2020. It was recorded when received in February 2021.

2. A computer costing P12,000 was expensed when purchased on July 1, 2019. It is expected to have a 4-year life with no residual value. The company typically uses straight-line depreciation for all property, plant, and equipment

3. Research costs of P99,000 were incurred early in 2019. They were capitalized and were to be amortized over a 3-year period. Amortization of P33,000 was recorded in 2019 and P33,000 for 2020.

4. On January 4, 2019, Light leased a building for 5 years at a monthly rental of P24,000. On that date, the company paid the following amounts, which were expensed when paid.

Security deposit - P60,000

First month's rent - 24,000

Last month's rent - 24,000

Total - P108,000

5. The company received P108,000 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 P54,600 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.

Assume all amounts are material and ignore income tax effects.

Question 1: Light Company's net income in 2019 is understated by how much?

Question 2: Light Company's net income in 2020 is understated by how much?

Question 3: The retained earnings reported on Light Company's statement of financial position at December 31, 2020, is understated by how much?