Paul Company issues a product recall due to an apparently preexisting and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is: To do nothing relative to the contingency. To accrue a long-term liability. To disclose it in a note to the financial statements. To accrue the liability and explain it in a note to the financial statements.

To accrue the liability and explain it in a note to the financial statements

Explanation:

Since Paul company discovers a pre-existing material defect after the end of its fiscal year and Paul to preexisting material defect after the end of it fiscal year, and the Financial statements have not yet been issued. What is expected of Paul's company is "To accrue the liability and explain it in a note to the financial statements".

This is relative to current liabilities and contingencies. In cases of a company acquiring a liability, the company is obliged to finances which is yet to be paid within that time, cash transactions has not occurred, but the company will pay from the proceeds it has received.

The liabilities incurred are recorded within the financial records of the given time that the payment is made and overturned after the payment is made.

Paul's company explaining the liability in the note of accrual presented in the financial statement at the end if that fiscal year shows a vital information that attention should be taken to when reading the company's balance sheet.

To accrue the liability and explain it in a note to the financial statements.

Explanation:

When a company accrues a liability, it incurs a financial obligation which has not been paid for yet in that period. The cash payment has not occurred yet however, the company still pays for the benefit gotten.

These liabilities are recorded in financial records in the period when the payment has not been made and reversed after the payment has been made.

Explaining the accrual in notes to the financial statements, reveals important information that should be carefully taken into consideration when reading a company's balance sheet.

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explanation:

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