Question Reworked: Contingent liability: Recall
The accountants for Overton Corp., a manufacturer of household paints, are preparing the annual
financial statements as of December 31, 2025. Because of the progress of the government's
investigation of a health hazard in one of its paint lines, Overton Corp.'s legal counsel believes
that Overton Corp. will probably have to recall all of the cans of paints produced in the last six
months. The management team at Overton Corp. estimates that it will most likely cost $800,000
to recall the paint, but the total cost may be as little as $690,000 or as much as $975,000.
a) Should Overton Corp. record a journal entry for the recall? If so, what is the amount used
for the journal entry?
b) Should Overton Corp. discuss the recall in its footnote?
