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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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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?

1.

To determine

Explain the manner by which Company S will report the potential costs due to the discovery of   a possible product defect.

Explanation

Contingent liability:

This is an uncertain obligation which might be incurred on a future date as a result of any past transaction. So, the companies should provide provision for such uncertain liabilities in the financial statements.

When there is a possibility of defect it is subject to some uncertainty. Moreover few suggest that the liability that is to be incurred is probable and the amount can be reasonably estimated...

2.

To determine

State the manner by which the Company S is required to report the potential claim on damages during the year that may be received in the next year.

3.

To determine

State the manner by which the Company S should account the potential cost and obligation that is due to the promotion campaign during the year.

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