Question

Marigold Corp., a manufacturer of household paints, is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Marigold recall all cans of this paint sold in the last six months. The management of Marigold estimates that this recall would cost $806000. What accounting recognition, if any, should be accorded this situation

Answer 1

Based on U.S. GAAP principles, the accounting recognition to be recorded in a journal would be:

Date                      Account title                                           Debit         Credit    

December 31        Loss from estimated contingency      $806,000

                             Estimated liability from contingency                    $806,000

Requirements for recording a loss from Contingency

• Loss must be probable.
• Loss amount can be reasonably estimated.

The loss is probable as the government has indicated its wishes clearly. The loss amount is also reasonably estimated to be $806,000. This can therefore be recorded as the above.

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