Question

Question 3.2                                                                                                       (Total: 22 marks; 2 marks each)

For each of the items listed below, indicate how it should be treated in the financial statements. Use the following letter code for your selections:

a.      Ordinary item on the income statement

b.      Discontinued operations

c.      Unusual item on the income statement

d.      Adjustment to prior year’s retained earnings

_____ 1. The bad debt rate was increased from 1% to 2% of sales, thus increasing bad debt expense.

_____ 2. Obsolete inventory was written off. This was a material amount, and the first loss of this type in the company's history.

_____ 3. An uninsured earthquake loss was incurred. This was the first loss of this type in the company's history.

_____ 4. Recognition of revenue earned last year, inadvertently omitted from last year's income statement.

_____ 5. The company sold one of its warehouses at a loss.

_____6. Settlement of a court case involving the federal government, related to income taxes of three years ago. The company is continually involved in various adjustments with the federal government related to its taxes.

_____ 7. A loss incurred from expropriation – the company owned resources in South America which were taken over by a dictator unsympathetic to Canadian business interests.

_____ 8. The company failed to record depreciation in the previous year.

_____ 9. Discontinuance of all production in Canada. The manufacturing operations were relocated to Honduras.

_____ 10. Loss on sale of investments. The company last sold some of its investments two years ago.

_____11. Loss on the disposal of a segment of the business.

Question 3.3                               (Total: 45 marks; part 1: 24 marks; part 2: 15 marks; part 3: 6 marks)

Star Finder Inc. has provided the following information for the year ended December 31, 2021:

Sales revenue	$1,300,000	Loss on inventory due to decline in net realizable value	$80,000
Unrealized gain on FV-OCI equity investments	42,000	Loss on disposal of equipment	35,000
Interest income	7,000	Depreciation expense related to buildings omitted by mistake in 2020	55,000
Cost of goods sold	780,000	Retained earnings at December 31, 2020	980,000
Selling expense	65,000	Loss from expropriation of land	60,000
Administrative expense	48,000	Dividends declared	45,000
Dividend revenue	20,000

The effective tax rate is 25% on all items. Star Finder Inc. prepares financial statements in accordance with IFRS. The FV-OCI equity investments trade on the stock exchange. Gains/losses on FV-OCI investments are not recycled through net income.

Required:

1.      Prepare a multi-step statement of financial performance for 2021, showing expenses by function. Ignore calculation of EPS.

2.      Prepare the retained earnings section of the statement of changes in equity for 2021.

3.      Prepare the journal entry to record the depreciation expense omitted by mistake in 2020.

Answer 1