Blitz Corporation, a manufacturer of cleaning products, is preparing annual financial statements at December 31, 2011.Because of a recently proven health hazard in one of its cleaning products, the U.K.government has clearly indicated its intentional of having Blitz recall all cans of this paint sold in the last three months.The management of Ortiz estimates that this recall would cost £5,800,000.What accounting recognition, if any, should be accorded this situation?

Question

Quizplus · Accepted Answer

The company should recognize a liability for the estimated cost of the recall, as it is probable that an outflow of resources will be required to settle the obligation. The expense and liability should both be recorded at the estimated amount of £5,800,000.

Blitz Corporation, a Manufacturer of Cleaning Products, Is Preparing Annual