Reference no: EM132971049

Question - HygyColor co. is a paint manufacturing company specialized on the production of high quality paint that is bacteria resistant. The main customers of HygyColor are hospitals and other medical institutions. HygyColor is reporting under IFRS and is finalizing its accounts for the year ended 31 December 2020. You are acting as an external accounting expert and the company asked for your help in relation with the accounting treatment of certain transactions and the interpretation of their financial statements. Task 2 HygyColor produced a production run of paint, where serious quality issues arose. One of HygyColor's biggest customer sued the company for breaching the contractual obligations. According to HealthyColor's lawyer there is 10% chance to defend the case successfully, 70% chance to pay EUR 100,000 and 20% chance to pay EUR 200,000 to the customer.

a) Explain in details the accounting treatment according to IFRS and show the relevant booking entries (i.e. name the relevant accounts and amounts, give reference to the applicable IFRS requirements and explain the rule in details).

b) As a consequence of the above law suit HygyColor lost a few of its customer and the relating revenues. Therefore the management provided EUR 500,000 for future operating losses. The provision was clearly supported with detailed calculations. Explain in details if this accounting treatment is acceptable or not under IFRS. Set examples (at least 2) of items/transactions that can be typical provisions of a kind of company as above.