A dog food manufacturer is debating how the items below should be booked on its financial statements. Determine if the items should be on the financial statements and, if it is needed, how the item should be presented.
A) One of its products contained an unknown bacteria that made several dogs ill. It is probable that the incident will result in liabilities for the company. Fortunately the company has no prior experience with such liabilities, but this means it is unsure how much the related settlements will ultimately end up costing.
B) The factory has a promotion running. Customers may mail in 3 proofs of purchases and $5 and receive a deluxe metal dog bowl with their dog's name on it. From past experience with similar promotions, of the 300,000 bags of dog food sold, it is estimated that 30% of the proofs of purchases will be redeemed. Of that 20% will be redeemed this year and 10% will be redeemed next year. The company spends $8 on each dog bowl.
C) Because the company leases part of its factory to a fireworks facility, it is unable to obtain fire insurance on the property. The company has decided to self-insure and is setting aside $12,000 per year in a separate account to cover any fire damage the plant may incur in the future. It is estimated that if the factory does burn down that it would cost $200,000 to rebuild it.