You must prepare a Statement of Advice (SoA) that addresses all the questions raised in the letter on the following two pages of this document. Assessment Description Assume that you are a manager in a consulting and accounting firm, Key Business Services(KBS), located at 1 Main Street, Business District, 1000, Melbourne. Among other things, your firm provides its clients with advice regarding accounting issues, including applying the Australian Accounting Standards in preparing Financial Reports. You must prepare a Statement of Advice (SoA) for Stumped Ltd. (a toy manufacturer) to address several accounting issues raised by Ms Maztbie Wright on behalf of the company's directors. Ms Wright has raised these issues in a letter in the following two pages. The maximum length for the SoA is 2,000 words. You should address all the technical issues in your advice, followed by a Reference List. Marks will be awarded based on two components: Technical component 30% - This includes the technical discussion in your SoA, the explanation of each issue, and the sources used. You must analyse the information provided and recommend the correct accounting treatment. You must justify your recommendations by referencing specific paragraphs of relevant accounting standards. You must explain the rationale behind each accounting standard requirement. Communication Skills (Writing Skills) component 10% - marks will be awarded based on your ability to gather information and effectively communicate strategies to the client as part of the SoA. It will also cover the generic skill of writing, clear meaning, structure and organisation, appropriate tone and grammar, spelling, and punctuation, etc., throughout the whole assignment. Refer to the rubrics on the following pages for a breakdown of marks. Document Classification: Public Page 2 Kaplan Business School Assessment 3 Outline Maztbie Wright, PA to Managing Director Stumped Limited 101, Main Street, Business District, Melbourne, 1000 3 September 2022 [Student Name] Manager Key Business Services 1 Main Street, Melbourne, 1000 Dear [Student Name] I am writing to seek your advice regarding numerous accounting issues. As you know, most of our directors have limited accounting knowledge and are a bit confused with the accounting treatment for several items that our junior accountant has proposed. Our senior accountant is on sick leave, and we are unsure when she will be back. The directors want to ensure that the junior accountant's proposal is in line with the requirements of the Australian Accounting Standards. They would also like to understand the reasoning behind the appropriate accounting treatments. The items of concern are as follows: 1. The directors are confident that a new toy in the making, Sothies, will be a best seller. During the year ended 30 June 2022, we have incurred $32,000 to identify alternative materials to manufacture this product. The initial material identified has proven difficult to obtain. Our junior accountant insists that we should recognise this amount as an expense, but the directors are adamant that the $32,000 should be included as an asset in the balance sheet as it has the potential to produce economic benefits. 2. We have developed a pre-production prototype for Aquadelight, another toy. Aquadelight is a swimming pool toy and aids floatation. The total amount incurred for the pre-production prototype amounted to $55,000. Our accountant says there is a possibility we can recognise this amount as an asset but has not been clear on how to make this determination. Can you please explain how to determine if we can recognise this amount as an asset? Please explain the requirements with examples that would be relevant to Aquadelight. The directors are also confused with the terms definition and recognition of an asset. They want to know why an item that meets the definition of an asset is not always recognised as an asset? Could you please give a couple of examples to support this distinction? STUMPED LIMITED Document Classification: Public Page 3 Kaplan Business School Assessment 3 Outline 3. 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. 4. 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. 5. 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 3 to 5, 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.