DrumCo is a private company reporting under ASPE that manufactures and sells industrial oil drums. The company year end is December 31.

DrumCo has unionized plant workers. In March 2022, the workers went on strike for three weeks, and temporary contract workers were hired to replace the union workers during that time. It was subsequently determined that lower-quality units were produced by the temporary workers, and some drums have since been confirmed to be defective. Thankfully, none of these defective drums resulted in oil spills, but some have been returned. Approximately 800 oil drums were manufactured and shipped during that period, 32 of which have already been replaced at a cost of $400 per drum.

Management thinks that another 50 drums might be defective and has committed to its distributors to replace any drums with manufacturing defects for a period of one year after purchase.

The cost of the 32 replacement drums was included in cost of sales, but no amount has been included in the 2022 financial statements for the possibility of any additional defective drums. In the past, it was rare for the company to experience returns from its distributors.

The companys credit facility requires maintenance of a debt-to-equity ratio of no more than 2:1 at each balance sheet date.

1. Using the case writing methodology for approaching financial accounting issues, analyze the above situation and come to a supported conclusion on the accounting treatment for the above scenario. Be sure to advise on any corrections needed to the financial statement.