Question

The following account balances were included in the trial balance of Sarasota Corporation at June 30, 2020:

Sales revenue		$1,839,650		Telephone and Internet expense (office)		$3,620
Cost of goods sold		1,061,770		Salaries and wages (office)		7,920
Salaries and wages expense (sales)		53,260		Supplies expense (sales)		5,050
Sales commission expense		99,000		Repairs and maintenance expense (office)		9,430
Advertising expense (sales)		29,130		Depreciation understatement due to error—2018 (net of tax of $3,300)		18,400
Freight out		21,700		Miscellaneous expense (office)		6,500
Entertainment expense (sales)		15,320		Dividend revenue		39,500
Telephone and Internet expense (sales)		9,230		Interest expense		18,500
Depreciation of sales equipment		5,880		Income tax expense		134,200
Repairs and maintenance expense (sales)		7,100		Dividends declared on preferred shares		10,005
Miscellaneous expenses (sales)		5,415		Dividends declared on common shares		33,300
Supplies expense (office)		3,550
Depreciation expense on office furniture and equipment		8,250

During 2020, Sarasota incurred production salary and wage costs of $698,300, consumed raw materials and other production supplies of $477,670, and had an increase in work-in-process and finished goods inventories of $114,200. The Retained Earnings account had a balance of $278,000 at June 30, 2020, before closing. There are 180,000 common shares outstanding. Assume Sarasota has elected to adopt IFRS. (Hint: Production payroll and materials costs reduced by the increase in ending work-in-process and finished goods inventories = the cost of goods sold.)

a.Prepare an income statement for the year ended June 30, 2020, using the multiple-step format and showing expenses by function. (List Selling Expenses before Administrative Expenses. Round per share answer to 2 decimal places, e.g. 52.74.)

b.Prepare the retained earnings portion of the statement of changes in equity for the year ended June 30, 2020. (List items that increase retained earnings first after adjusted balance.)

c.Prepare an income statement for the year ended June 30, 2020, using the single-step format and showing expenses by nature. (Round per share answer to 2 decimal places, e.g. 52.74.)

d.Assume the average market price of the common shares outstanding was $31.70. What was Sarasota’s price-earnings ratio? (Round answer to 1 decimal place, e.g. 52.5.)

Answer 1

a)
Sarasota Corporation
Income Statement
For the year ended June 30, 2020
Sales revenue			$      1,839,650
Less: Cost of goods sold			$      1,061,770
Gross Profit			$         777,880
Operating Expenses:
Selling expenses
Sales commissions expense	$        99,000
Salaries and wages expense	$        53,260
Advertising expense	$        29,130
Entertainment expense	$        15,320
Freight-out	$        21,700
Telephone and internet expense	$          9,230
Depreciation expense	$          5,880
Maintenance and repairs expense	$          7,100
Supplies expense	$          5,050
Miscellaneous expense	$          5,415	$      251,085
Administrative expenses:
Salaries and wages expense	$          7,920
Maintenance and repairs expense	$          9,430
Depreciation expense	$          8,250
Supplies expense	$          3,550
Telephone and internet expense	$          3,620
Miscellaneous expense	$          6,500	$        39,270	$         290,355
Income from operations			$         487,525
Other revenues
Dividend revenue			$           39,500
			$         527,025
Other expenses
Interest expense			$           18,500
Income before income tax			$         508,525
Income tax			$         134,200
Net income			$         374,325
Earnings per share (374,325 - 10,005)/180,000 shares	$            2.02
b)
Sarasota Corporation
Statement of Retained earnings
For the year ended June 30, 2020
Retained earnings, July 1, 2020, as reported		$ 278,000.00
Depreciation understatement due to error—2018 (net of tax of $3,300)		$   18,400.00
Balance July 1, 2020 adjusted		$ 296,400.00
Add: Net income		$      374,325
		$ 670,725.00
Deduct:
Dividends declared on preferred shares	10,005
Dividends declared on common shares	33,300	43,305
Retained earnings, June 30, 2021		$ 627,420.00
c)
Sarasota Corporation
Income Statement
For the year ended June 30, 2020
Revenues
Net sales	$   1,839,650
Dividend revenue	$        39,500
Total revenues		$   1,879,150
Expenses
Raw materials and supplies consumed =$477,670 + 3550 + 5050	$      486,270
Increase in work-in-process and finished goods inventories	-114200
Employee benefit expense  ($698,300 + 99000 + 53260 + 7920)	$      858,480
Advertising expense	$        29,130
Transportation expense	$        21,700
Maintenance and repairs expense	$        16,530
Entertainment expense	$        15,320
Depreciation expense	$        14,130
Telephone and internet expense	$        12,850
Miscellaneous expense	$        11,915
Finance costs	$        18,500
Total expenses		$   1,370,625
Net income before income tax		$      508,525
Income tax		$      134,200
Net income		$      374,325
Earnings per share (374,325 - 10,005)/180,000 shares	$            2.02
d)
Price earning Ratio = Market price/EPS = $31.70/2.02	15.7