E13.7 Apply recognition criteria underlying accounting.LO7

Computer Games Ltd reported a profit of $50 560 for the year ending 31 December 2019. However, upon closer examination of the accounting records, the chief financial officer noticed the following important information:

1. Service revenues included an advance of $20 000 for computer games to be delivered in March of the following year.

2. There was $2300 of advertising supplies on hand at 31 December that was recorded as supplies expense.

3. Prepaid insurance included an amount of $12 000, which is the whole amount paid on 1 October 2019 for a 1-year policy.

4. The following invoices had not been paid: advertising for week of 24 December, $2500; repairs made on 10 December, $2000; and electricity expense, $800.

5. At 31 December, 2 days wages had not been accrued or paid, amounting to $400.

6. The business took out a loan of $240 000 on 1 January 2019 at an annual interest rate of 10%. The amount for interest expense for the month of December was not accrued.

Required

Explain the generally accepted accounting principles that were not followed in preparing the statement of profit or loss and their effect (under or overstatement) on the results.