CASE 116 Contingencies

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

1. 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.
2. One of the firms 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.
3. This year, Angela began promoting a new toy by including a coupon, redeemable for a movie ticket, in each toys 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 percent of the coupons would be redeemed. Forty percent of the coupons would be actually redeemed this year, and the remaining 20 percent of the coupons were expected to be redeemed next year.

Required:

1. How should Angela report the safety hazard? Why? Do not discuss deferred tax implications.
2. How should Angela report the uninsured flood risk? Why?
3. How should Angela account for the toypromotion campaign in this year?