Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2014. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

Question

Quizplus · Accepted Answer

The estimated cost of the recall meets the definition and criteria for recognition as a liability under generally accepted accounting principles. The cost is probable, meaning it is likely to occur, and can be reasonably estimated. Therefore, the appropriate accounting treatment is to recognize the estimated $800,000 as an operating expense and a liability on the balance sheet. No note disclosure or appropriation of retained earnings is necessary in this situation.

Overton Corporation, a Manufacturer of Household Paints, Is Preparing Annual