Question 1 [15 marks]

Topic 2: Presentation of financial statements Topic 3: Accounting policies and other disclosures

You are a senior financial accountant at Wagga Ltd, a company that distributes imported furniture. One of the new graduate accountants has prepared the following income statement for the year ended 30 June 2019:

Income Statement for the year ended 30 June 2019

Revenue (NOTE 1) 1,380,000

Cost of sales (590,000)

Gross profit 790,000

Other income (NOTE 2) 18,500

Distribution expenses (NOTE 3) (55,000)

Administrative expenses (NOTE 4) (40,000)

Other expenses (NOTE5) (175,000)

Profit for the year 538,500

Other comprehensive income: Net profit on asset (NOTE6) 35,000

Loss on inventories (NOTE 7)(25,000)

Other comprehensive income for the year 10,000

Total comprehensive income for the year 548,500

Notes:

1. Revenue includes interest revenue and rent received of $180,000 and $20,000 respectively.

2. Other income of $18,500 (net of tax) relates to gains arising from the translation of transactions denominated in foreign currencies.

3. Distribution expenses includes sales returns of $15,000.

4. Included in the administrative expenses are interest expense of $25,000.

5. Other expenses amount includes income tax expense of $128,000.

6. Net profit on asset relates to gains made on the disposal of an office building of Wagga Ltd.

7. Loss on inventories relates to the write-down of inventories to their net realisable values.

8. On 20 August 2019, a fire occurred and destroyed some of the furniture. The financial statements for the year ended 30 June 2019 were authorised on 12 September 2019. This loss, totaling $16,000, has not been recorded in the books. The amount involved is considered material.

Wagga Ltd uses the single statement format for the statement of profit or loss and other comprehensive income and classifies their expenses by function in the statement.

Required:

A. In relation to the classification of expenses as adopted by Wagga Ltd, state and explain the other classification style allowed by AASB101Presentation of Financial Statements. Which classification style is better? Do you think Wagga Ltd has chosen a method that is better for them? Why?

B. How should Wagga Ltd account for the fire occurred on 20 August 2019 in their financial statements for the period ending 30 June 2019? When should the adjustment for the loss be made in the accounts?Note:You should substantiate your answer by making references to AASB110Events after the Reporting Period.

C. Prepare a corrected statement of profit or loss and other comprehensive income for Wagga Ltd for the year ended 30 June 2019, to ensure that it complies with the requirements of AASB 101 and the Australian Conceptual Framework, where relevant.

Provide references to relevant authorities to support your answers. Note:You are not required to provide any notes to the accounts or disclosures relating to this statement.

Important tips:

Ignore the requirement for prior period comparative figures.

For requirement 3 above, you should provide separately all workings and explanations to support the figures presented in the statement and make references to AASB101 wherever possible to substantiate your answer. In preparing the statement, you should use the captions that are generally used by a listed entity.