Smart Ltd is one of the largest hardware chains and operating 1 020 stores across Australia. Between January 2018 and October 2018, Smart Ltd purchased electrical wires and cables from Superstrong Cable Ltd and sold them to a wide range of customers. However, in September 2019, Smart Ltd discovered that the electrical cables manufactured by Superstrong Cable Ltd failed the required ageing tests specified in the Safety Standard and could become prematurely brittle with age. Whilst there is no immediate safety risk, Smart Ltd is concerned about potential regulatory consequences from the Australian Competition and Consumer Commission (ACCC). Thus, it immediately established a dedicated project team to contact affected customers and determine the appropriate course of remediation. Notwithstanding the work undertaken to date, as at the balance sheet date, there is limited available data relating to the specific application of the cable sold to customers and the range of possible remediation outcomes. 

Required: 

i). Explain how this event should be accounted for in the financial statements of Smart Ltd for the year ended 30 June 2020. In your answer, you must clearly state your position, provide the evidence that you have used to determine that position and support your answer with paragraph references from one or more relevant Australian Accounting Standards. 

ii). Specify any journal entry(ies) and/or disclosures that may be required. Narrations are not required.

Answer rating: 100% (QA)

i This event should be accounted for as provision and should be recognized as liability In paragraph ... View the full answer