Chapter 9, Problem 5C

Various Contingency Issues

Skinner Company has the following contingencies:

1. 1. Potential costs due to the discovery of a possible defect related to one of its products. These costs are probable and can be reasonably estimated.
2. 2. A potential claim for damages to be received from a lawsuit filed this year against another company. It is probable that proceeds from the claim will be received by Skinner next year.
3. 3. Potential costs due to a promotional campaign in which a cash refund is sent to customers when coupons are redeemed. Skinner estimated, based on past experience, that 70% of the coupons would be redeemed. Forty percent of the coupons were actually redeemed and the cash refunds sent this year. The remaining 30% of the coupons are expected to be redeemed next year.

Required:

1. 1. How should Skinner report the potential costs due to the discovery of a possible product defect? Explain why.
2. 2. How should Skinner report this year the potential claim for damages that may be received next year? Explain why.
3. 3. This year, how should Skinner account for the potential costs and obligations due to the promotional campaign?