MediCo develops and manufactures generic prescription drugs and over-the-counter medications. During November 2020, MediCo distributed 15,000 bottles of its cherry-flavored childrens cough medicine to various distributors and retailers. On December 14, 2020, MediCo discovered that 3,000 of the bottles were distributed with dosing cups that are missing the appropriate 5mL and 10mL graduations. MediCo is concerned that the use of the incorrect dosing cups could result in dangerous overdoses to children. There are no laws or regulations requiring MediCo to recall the childrens cough medicine because of the incorrect dosing cups. In addition, there have been no consumer lawsuits brought against MediCo for the distributed bottles. Because of the potential risk to children associated with the mislabeled dosing cups, MediCo decided to voluntarily recall the childrens cough medicine. On January 12, 2021, MediCo announced the recall of the affected bottles, which is estimated to cost MediCo $25,000.

Required: 1. How should MediCo account for the voluntary product recall in its financial statements for the year ended December 31, 2020?

2. Assume that the FDA brought action against MediCo on December 21, 2020 in regard to the defective caps. How would that be reported in its financial statements for the year ended December 31, 2020?

Prepare a clear, concise memo, containing answers to the required questions. Explain your answers and provide support for your answers from the Accounting Standards Codification.