Various Liability Issues
Response to the following problem:
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 its small warehouses is located on the bank of a river and could no longer be insured against flood losses. No flood losses have occurred after the date that the insurance became unavailable.
3. 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 costs Angela $2, is purchased in advance and then mailed to the customer when the coupon is received by Angela. Angela estimated, based on past experience, that 60% of the coupons would be redeemed. Forty percent of the coupons were actually redeemed this year, and the remaining 20% of the coupons are expected to be redeemed next year.
Required
1. How should Angela report the safety hazard? Explain why. Do not discuss deferred income tax implications.
2. How should Angela report the noninsurable flood risk? Explain why.
3. How should Angela account for the toy promotion campaign in this year?