Case 11-6 ContingenciesAngela Company is a manufacturer of toys. During the year, the following situations arose:A safety hazard related to one of its toy products was discovered. It is considered probable that liabilities have been incurred. Based on past experience, a reasonable estimate of the amount of loss can be made.One of the firm’s small warehouses is located on the bank of a river and can no longer be insured against flood losses. No flood losses occurred after the date the insurance became unavailable.This year, Angela began promoting a new toy by including a coupon, redeemable for a movie ticket, in each toy’s carton. The movie ticket, which cost Angela $2, is purchased in advance and then mailed to the customer when Angela receives the coupon. Based on past experience, Angela estimated that 60% of the coupons would be redeemed. Forty percent of the coupons would be actually redeemed this year, and the remaining 20% of the coupons were expected to be redeemed next year.Required:How should Angela report the safety hazard? Why? Do not discuss deferred tax implications.How should Angela report the uninsured flood risk? Why?How should Angela account for the toy-promotion campaign in this year?

Liability is the amount which has to be paid by the organisation.

Answered: Angela Company is a manufacturer of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Case 11-6 Contingencies

Angela Company is a manufacturer of toys. During the year, the following situations arose:

A safety hazard related to one of its toy products was discovered. It is considered probable that liabilities have been incurred. Based on past experience, a reasonable estimate of the amount of loss can be made.
One of the firm’s small warehouses is located on the bank of a river and can no longer be insured against flood losses. No flood losses occurred after the date the insurance became unavailable.
This year, Angela began promoting a new toy by including a coupon, redeemable for a movie ticket, in each toy’s carton. The movie ticket, which cost Angela $2, is purchased in advance and then mailed to the customer when Angela receives the coupon. Based on past experience, Angela estimated that 60% of the coupons would be redeemed. Forty percent of the coupons would be actually redeemed this year, and the remaining 20% of the coupons were expected to be redeemed next year.

Required:

How should Angela report the safety hazard? Why? Do not discuss deferred tax implications.
How should Angela report the uninsured flood risk? Why?
How should Angela account for the toy-promotion campaign in this year?

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