Skinner Company has the following contingencies: Potential costs due to the disc

Question

Skinner Company has the following contingencies:

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.

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.

Potential costs due to a promotional campaign whereby 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. In actuality, 40% 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.

QUESTION: This year, how should Skinner account for the potential costs and obligations due to the promotion campaign? Explain the reasons for your answer.

Explanation / Answer

In our case : How should Skinner report the potential costs due to the discovery of a possible product defect? The skinner report the whole 70% of contingent liablity at under the balnce sheet as hint as followsLabilites $ Assets $ Redemption of coupons [+L] XXX less; Provision for redemption of coupons [+losses] How should Skinner report this year the potential claim for damages that may be received next year? This will not be shown under current year's financial statements. Since it is anticipated income it would be shown, when it is physically realized and received. This year, how should Skinner account for the potential costs and obligations due to the promotion campaign? Explain the reasons for your answer In this year skinner has to create provision for only 30%, since already the 40% was redeemed in this current year. So the provision for this redemption of coupon would be 30%. Contingency event: It is depends on the future event. According to conservatism concept... In our case the suit will have been closed in future of time (by next year), In this the future is expected, but not certainly. In case of anticipated income, we can't expect and we cannot directly treated it is an income, Until physically received the income. So that, this kind of uncertain income, we won't show under any head in the balance sheet. Just we will show at bottom of the balance sheet as a hint. But in case of anticipated losses, we can create provision for them. In our case the redemption of coupons 70% has been expected, and we can create provision for them like below Debit Credit Redemption of coupons [-L] XXX Provision for redemption of coupons [+E] XXX

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