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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Dobbin Corporation, a manufacturer of house-hold paints, is preparing annual financial state­ments at year end. Because of a recently proven health hazard in one of its paints, the government required Dobbin to recall all cans of this paint sold in the last 6 months. The management of Dobbin estimates that this recall cost $1,000,000.

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

  1. a. no recognition
  2. b. footnote disclosure
  3. c. operating expense of $1,000,000
  4. d. liability of $1,000,000

To determine

Identify the correct option for the given situation.

Explanation

Expense recognition principle:

The expense recognition principle follows the same theory of revenue recognition principle. In expense recognition principle, the expense is recognized for the same period in which, the revenue is recognized. In other words, expenses incurred during the period to earn certain revenues are recognized...

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