Fido Corp. includes one coupon in each bag of dog food it sells. In return for three coupons, customers receive a dog toy that the company purchases for $1.20 each. Fido's experience indicates that 60% of the coupons will be redeemed. During 2017, 100,000 bags of dog food were sold, 12,000 toys were purchased, and 45,000 coupons were redeemed. During 2018, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed.
Determine the premium expense to be reported in the income statement and the estimated liability for premiums on the statement of financial position for 2017 and 2018.
Ex. 13-79Contingent liabilities
Below are three independent situations:
1.In August, 2017, a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued his employer, Prince Corp., for $500,000. Prince’s legal counsel believes it is possible that the outcome of the suit will be unfavourable and that the settlement would cost the company from $150,000 to $400,000.
2.On October 4, 2017, a lawsuit for breach of contract seeking damages of $2,400,000 was filed by an author against Queen Corp. Queen's legal counsel believes that an unfavourable outcome is more likely than not. A reliable measurement of the award to the plaintiff is between $600,000 and $1,800,000.
3.King Ltd. is involved in a pending court case. King's lawyers believe it is likely that King will be awarded damages of $700,000.
Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers. Assume all companies involved use IFRS.