Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2010.Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months.The management of Ortiz 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 should be recognized as an operating expense and a liability of the same amount should also be recorded since it represents an obligation of the company to recall the product. This is in accordance with the matching principle in accounting where expenses should be recognized in the same period as the related revenue. No note disclosure or appropriation of retained earnings is necessary in this situation.

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