1. The company has a policy of refunding retailers who are dissatisfied with their purchase if the request is made within 14 days. This is a practice of Stumped Limited but is not required by law. This practice is known and frequently utilised by its customers. The directors feel that there is no need to make any accounting entries for this since the refund is not required by law.

2. A court case that has been ongoing for 6 months, relating to Stumped Limited using a manufacturing method that was patented by another toy producer, was finalised on 23 July 2020. Stumped Limited was required to pay damages of $120,000 to the other toy company. A provision of $100,000 was previously provided in relation to this.

3. In January of 2022, the company was sued because a toddler choked on some small parts of a toy manufactured by Stumped Limited and had to be rushed to the emergency department. Luckily the toddler recovered but had to be hospitalised for 2 weeks and this caused the parents a tremendous amount of distress. On 2 July 2022, the court case was still ongoing, and our lawyers felt that the court will find the company liable. The lawyer estimated the amount of damages that may be awarded could be anything between $100,000 to $600,000.

The junior accountant has tried to explain the accounting treatment for items 1 to 3, using terms like liability, provision, contingent liability, present obligation, etc., but failed to explain in a way that the directors could understand. Along with your advice for the correct accounting treatment for the above three items, could you also please explain the terms used by the junior accountant?

I would appreciate it if you could prepare a Statement of Advice to address the above issues at your earliest convenience.