Paul Company issues a product recall due to an apparently pre-existing and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is:
A)To disclose it in a footnote.
B)To accrue a long-term liability.
C)To accrue the liability and explain it in a footnote.
D)To do nothing relative to the contingency.

Question

Quizplus · Accepted Answer

The best choice is to accrue the liability and explain it in a footnote. This is because the defect is material and the contingency is reasonably estimable. As a result, Paul Company needs to account for the liability in the financial statements and disclose it in a footnote to ensure that the financial statements are not misstated. Accruing the liability and providing an explanation in a footnote will provide transparency to stakeholders and help them understand the potential impact on the company's financial position. Doing nothing relative to the contingency is not an appropriate course of action as it could result in misstated financial statements. Similarly, simply disclosing the contingency in a footnote without accruing the liability would not provide an accurate representation of the impact on the company's financial position. Accruing a long-term liability without providing an explanation would not provide sufficient transparency to stakeholders.

Paul Company Issues a Product Recall Due to an Apparently