The total amount of shareholders' equity of Sunshine Ltd. was $3,800,000 on 1 July 2020, includingsharecapital$1,900,000,generalreserve$780,000andretained earnings

$1,120,000.

For the year ended 30 June 2020, the company incurred the following income and expenses: sales $2,400,000, costs of goods sold $1,280,000, administrative expense $450,000, income tax expense is $235,000 (income tax rate is 30%).

During the year, the company issued $700,000 ordinary shares publicly. Because of the introduction of a new accounting standard at the beginning of the financial year, there was a decrease of $120,000 against the retained earnings. Interim dividends paid on 2 February 2020 were $180,000.

Required:

a)You are the financial accountant of Sunshine Ltd. You need to prepare Statement of Comprehensive Income and a Statement of Changes in Equity for the year ended 30 June 2020. (Narrations are not required in this question)

b)Explain whether it is permissible for a reporting entity to treat expenses directly as a reduction to retained earnings. Give an example.