QUESTION 2 54 MINUTES (30 POINTS)

KAKI Inc. (KAKI) is involved in the sale of luxury doors and windows and its year-end is December 31. As a result of its expansion in Western Canada, it took out a $5,000,000 loan from the Business Development Bank of Canada (BDC), which requires audited financial statements. In addition, KAKI plans to make an initial public offering in two years.

The accounting firm Teri et associs S.E.N.C.R.L. conducts the first set of audited financial statements in accordance with IFRS for the year ended December 31, 2020.

During its 2020 audit engagement, Teri et associs S.E.N.C.R.L. identified the following:

1. The insurance premium of $24,000 paid by KAKI on September 1, 2019 for the period of September 1^{, 2019 to August 31, 2020 was recognized as an expense in 2019.}

2. The insurance premium of $26,400 paid by KAKI on December 1^, 2020 for the period of September 1^{, 2020 to August 31, 2021 was recognized as an expense in 2020.}

3. The purchase of computer hardware and its application software in ^{the amount of $45,000 on July 1, 2020} was recognized as an expense as a result of KAKIs internal policy not to capitalize expenditures of less than $50,000. have an estimated life of 5 years and have no residual value in the future.

4. KAKI did not recognize the $150,000 executive owner vacation payment as of December 31, 2019.
5. KAKI did not recognize the $250,000 executive owner vacation payment as of December 31, 2020.
6. KAKIs December 31, 2020 inventory count overstated door inventory by $80,000 as these are the same items transferred from the Montreal warehouse to the Laval warehouse on the same day that were double-counted.
7. KAKIs December 31, 2020 inventory count underestimated the window inventory by $135,000 as these are US in-transit items owned by KAKI. KAKI also undervalued its accrued fees to its U.S. supplier by $135,000.

Work to be done

1. Prepare restated restated Statement of Operations and Earnings for the year ended December 31, 2020 and 2019 comparative information. Justify your calculations. (22.5 points)
2. Suppose the 2019 books of account are closed, pass the accounting entry in 2020 for the correction of errors. Justify your calculations. (7.5 points)

The following is a summary of the Statement of Operations and Non-distributed Operations prepared by KAKI Inc.

prior to the audit of Teri and Associates LLP.

KAKI Inc.

Statement of Operations and Non-distributed Operations

For the Year Ended December 31, 2020

		2020		2019
Sales		15,000,000	$	12,000,000	$
Cost of Sales		9,750,000	$	7,800,000	$
Gross Margin		5,250,000	$	4,200,000	$
Administration costs		2,000,000	$	1,500,000	$
Sales fees		500,000	$	350,000	$
Financial fees		250,000	$	-	$
Amortization		165,000	$	145,000	$
Net profit before taxes		2,335,000	$	2,205,000	$
Taxes (30%)		700,500	$	661,500	$
Net profit		1,634,500	$	1,543,500	$
Results not distributed	to the
beginning of the fiscal year		1,543,500	$	-	$
Dividends		(500,000	$)	-	$
Results not distributed to the
year end		2,678,000	$	1,543,500	$