You audited the financial statements of PIS Corp. for the first time in 2021. The company began operations in early 2019. Upon investigation, you discovered the following information:

• The company reported a net income of P104,000, P140,000 and P160,000 in 2019, 2020 and 2021, respectively.

• The company consistently omitted the following:

	2019	2020	2021
prepaid insurance	2,000	4,000	6,000
accrued wages	7,500	6,200	8,300
unearned rent	5,000	6,000	7,000

• Deliveries of merchandise to customers as of December 31 of each year-end were recorded as sales to be collected for the following year. The corresponding sales price of such deliveries was P15,000, P12,000 and P14,000 in 2019, 2020 and 2021, respectively.

• Inventory counts were performed on December 31 of each year before deliveries and receipts were made on that date. Sales were consistently made at a gross profit rate of 40% of sales.

• Purchases in transit at the end of each year amounted to P5,000 and P7,000 in 2020 and 2021 respectively. These were recorded as purchases upon receipt of the corresponding invoices in December.

• The company incurred pre-operational and organization costs totaling P80,000 in early 2019 which it had capitalized as an intangible asset and amortized over 5 years.

• Improvements were made and completed in early 2019 to the leased office space at a cost of P100,000 which had been capitalized in a lease improvement account and depreciated over its 10-year useful life. However, the term of the non-cancellable lease is 5 years with no option to renew.

Required

1. What is the effect of errors on 2019 working capital? 

2. What is the correct net income in 2021?

3. What is the correct net income in 2019?

Answer rating: 100% (QA)

1 The effect of errors on 2019 working capital can be calculated as follows Working capital Current assets Current liabilities Without the adjustments ... View the full answer