PART 3 PROVISIONS AND CONTINGENT LIABILITIES On 3 June 2022, SFX Ltd supplied a smoke machine for a concert. At the concert, the smoke machine exploded and a number of members of the audience were injured (i.e. suffered burns). On 4 July 2022 SFX Ltd was advised that it is being sued for damages of $120,000 in total. An investigation into the explosion has revealed that the explosion was due to a musician during the concert emptying a bottle of alcohol into the smoke machine. The smoke machines supplied by SFX Ltd have clear labels advising that the machine must not come in contact with any liquids. Further, a cover that SFX Ltd supplied with the smoke machine was removed by the customer. This cover could have prevented an explosion. Legal advice has indicated that there is only a 15% probability that SFX Ltd will be found liable and will be required to pay the damages claimed. This case is expected to be decided in court in September 2022. I REQUIRED Explain, in your own words, whether and how the above events should be recognised and/or disclosed in the financial statements and notes for the year ended 30 June 2022. You need to justify your answer with reference to the applicable accounting standard(s) (provided in Appendix B) and give reasons for your answer,
PART 3 PROVISIONS AND CONTINGENT LIABILITIES On 3 June 2022, SFX Ltd supplied a smoke machine for a concert. At the concert, the smoke machine exploded and a number of members of the audience were injured (i.e. suffered burns). On 4 July 2022 SFX Ltd was advised that it is being sued for damages of $120,000 in total. An investigation into the explosion has revealed that the explosion was due to a musician during the concert emptying a bottle of alcohol into the smoke machine. The smoke machines supplied by SFX Ltd have clear labels advising that the machine must not come in contact with any liquids. Further, a cover that SFX Ltd supplied with the smoke machine was removed by the customer. This cover could have prevented an explosion. Legal advice has indicated that there is only a 15% probability that SFX Ltd will be found liable and will be required to pay the damages claimed. This case is expected to be decided in court in September 2022. I REQUIRED Explain, in your own words, whether and how the above events should be recognised and/or disclosed in the financial statements and notes for the year ended 30 June 2022. You need to justify your answer with reference to the applicable accounting standard(s) (provided in Appendix B) and give reasons for your answer,
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:PART 3
PROVISIONS AND CONTINGENT LIABILITIES
On 3 June 2022, SFX Ltd supplied a smoke machine for a concert. At the concert, the smoke
machine exploded and a number of members of the audience were injured (i.e. suffered
burns). On 4 July 2022 SFX Ltd was advised that it is being sued for damages of $120,000 in
total. An investigation into the explosion has revealed that the explosion was due to a
musician during the concert emptying a bottle of alcohol into the smoke machine. The smoke
machines supplied by SFX Ltd have clear labels advising that the machine must not come in
contact with any liquids. Further, a cover that SFX Ltd supplied with the smoke machine was
removed by the customer. This cover could have prevented an explosion. Legal advice has
indicated that there is only a 15% probability that SFX Ltd will be found liable and will be
required to pay the damages claimed. This case is expected to be decided in court in
September 2022.
I
REQUIRED
Explain, in your own words, whether and how the above events should be recognised and/or
disclosed in the financial statements and notes for the year ended 30 June 2022. You need to
justify your answer with reference to the applicable accounting standard(s) (provided in
Appendix B) and give reasons for your answer.
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