PROBLEM 1

Gomez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2011. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Gomez recall all cans of this paint sold in the last six months. The management of Gomez estimates that this recall would cost $900,000.

Part A - What accounting recognition, if any, should be accorded this situation?

Part B - How would your answer change to Part A if 70% of the paint cans were sold before 12/31/2011 and the remainder were sold after 12/31/2011 but before the financial statements were issued on 3/5/2012?

Part C - How would your answer change to Part A if the health hazard was only alleged (but not yet probable) when the 2011 financial statements were published.