Peleton experienced a product recall on their treadmills. It is probable that the company will have customers submit their products for refunds. The company can reasonably estimate that they will encounter $60 million in product returns. How should the company treat the lawsuit in their financial statements?
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Step 1: The company should record a liability for the estimated product returns. Show more…
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Akash M.
Contingencies — Product Recall Pharma-C Inc. ("Pharma-C") develops and manufactures generic prescription drugs and over-the-counter medications. While Pharma-C is headquartered in the United States, its parent company is headquartered in Germany. During November 2020, Pharma-C distributed 10,000 bottles of its grape-flavored children's cough medicine to various distributors and retailers. On December 31, 2020, Pharma-C discovered that 2,000 of the bottles were distributed with dosing cups that are missing the appropriate 5 mL and 10 mL graduations. Pharma-C is concerned that the use of the incorrect dosing cups could result in dangerous overdoses to children. There are no laws or regulations requiring Pharma-C to recall the children's cough medicine because of the incorrect dosing cups. In addition, there have been no consumer lawsuits brought against Pharma-C for the distributed bottles. Because of the potential risk to children associated with the mislabeled dosing cups, Pharma-C decided to voluntarily recall the children's cough medicine. On January 2, 2021, Pharma-C announced the recall of the affected bottles, which is estimated to cost Pharma-C $10,000. Discussion: In its financial statements for the year ended December 31, 2020, how should Pharma-C account for the voluntary product recall under: (1) U.S. GAAP and (2) IFRS in reporting to its parent company in Germany?
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