Question

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

Star Finder Inc.
Statement of Financial Performance
For the Year Ended December 31, 2021
Sales revenue
Net sales revenue		$             1,300,000
Cost of goods sold		$                780,000
Gross Profit		$                520,000
Operating expenses
Selling expenses	$                   65,000
Administrative expenses	$                   48,000	$                113,000
Income from operations		$                407,000
Other revenues and gains
Dividend revenue	$                   20,000
Interest income	$                     7,000	$                  27,000
		$                434,000
Other expenses and losses
Loss on inventory due to decline in net realizable value	$                   80,000
Loss on sale of equipment	$                   35,000
Loss from expropriation	$                   60,000	$                175,000
Income before income tax		$                259,000
Income tax		$                  64,750
Net income		$                194,250
Other comprehensive income Items that may be reclassified subsequently to net income or loss:
Unrealized gain on FV-OCI investments (net of $10,500 income tax)= $42000 x (1-25%)		$                  31,500
Comprehensive income		$                225,750
b)
Star Finder Inc.
Statement of Changes in Equity
For the Year Ended December 31, 2021
Retained earnings balance, January 1, as reported	$                 980,000
Correction for overstatement of net income in priorperiod (depreciation error) (net of tax of $13,750)	$                  (41,250)
Balance, January 1, as restated	$                 938,750
Add: Net income	$                 194,250
	$              1,133,000
Less: Dividends declared	$             (45,000.00)
Retained earnings balance, December 31	$              1,088,000
c)
Account Titles & explanation	Debit	Credit
Retained Earnings	$                   41,250
Income Tax Payable/Receivable	$                   13,750
Accumulated Depreciation		$                  55,000
(To record the depreciation expense omitted by mistake in 2020)