Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2008. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The management of Lopez estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

Question

Quizplus · Accepted Answer

This situation should be recognized as both an operating expense and a liability of $800,000 in the financial statements. This is because the event (the recall) is a probable future outflow of resources (money) resulting from past transactions or events (the sale of the hazardous paint), and the amount can be reasonably estimated.

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