Reference no: EM132755554

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, on 27 August 2019, the Australian Competition and Consumer Commission (ACCC) issued a consolidated voluntary Safety Recall Notice under which suppliers of affected cable will remedy affected consumers. Smart Ltd established a dedicated project team to contact affected customers and determine the appropriate course of remediation. Smart Ltd estimated that the cost associated with remediation will be approximately $500 000.

Required:

Problem 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.

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