Paul Company issues a product recall due to an apparently preexisting 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 note to the financial statements.
B) To accrue a long-term liability.
C) To accrue the liability and explain it in a note to the financial statements.
D) To do nothing relative to the contingency.

Question

Quizplus · Accepted Answer

The correct action required by Paul Company is to accrue the liability and explain it in a note to the financial statements. This is because the contingency is reasonably estimable and material, and the financial statements have not yet been issued. As such, it is important for Paul Company to disclose the issue to its stakeholders, both through accrual and disclosure in the financial statements. Doing nothing or merely disclosing it in a note to the financial statements without accruing the liability would be inadequate. Accruing a long-term liability without explanation would also be insufficient in communicating the issue to stakeholders.

Paul Company Issues a Product Recall Due to an Apparently