Goods Company is a major manufacturer of foodstuffs. The company's products are sold in grocery and convenience stores throughout the United States. Goods' name is well known and respected because its products have been marketed nationally for over 50 years.
In April 2010 Goods was forced to recall one of its major products. A total of thirty-five persons in Chicago were treated for severe intestinal pain, and eventually three people died from complications. All of the people had consumed Goods' product.
The product causing the problem was traced to one specific lot. Goods keeps samples from all lots of foodstuffs. After thorough testing, Goods and the legal authorities confirmed that the product had been tampered with after it had left the company's plant and was no longer under the company's control.
The entire product was recalled from the market-the only time a Goods product has been recalled nationally and the only time for reasons of tampering. People who still had the product in their homes, even though it was not from the affected lot, were encouraged to return it for credit or refund. The company designed and implemented a media campaign to explain what had happened and what the company was doing to minimize any chance of recurrence. Goods decided to continue the product with the same trade name and the same wholesale price. However, the packaging was redesigned completely to be tamper resistant and safety sealed. This required the purchase and installation of new equipment.
The corporate accounting staff recommended that the costs associated with the tampered product is treated as an extraordinary charge on the 2010 financial statements. Corporate accounting was asked to identify the various costs that could be associated with the tampered product and related recall. These costs ($000 omitted) are as follows.
Credits and refunds to stores and consumers...........................................$30,000
Insurance to cover lost sales and idle plant costs for possible future recalls................6,000
Transportation costs and off-site warehousing of returned product....................1,000
Future security measures for other products...............................................4,000
Testing of returned product and inventory...................................................700
Destroying returned product and inventory...............................................2,400
Public relations program to reestablish brand credibility................................4,200
Communication program to inform customers,
answer inquiries, prepare press releases, and so on......................................1,600
Higher cost arising from new packaging....................................................700
Investigation of possible involvement of employees,
former employees, competitors, and the like...............................................500
Packaging redesign and testing............................................................2,000
Purchase and installation of new packaging equipment.................................6,000
Legal costs for defense against liability suits...............................................600
Lost sales revenue due to recall...........................................................32,000
Goods' estimated earnings before income taxes and before consideration of any of the above items for the year ending December 31, 2010, were $230 million.
Required:
a. Goods Company plans to recognize the costs associated with the product tampering and recall as an extraordinary charge.
i. Explain why Goods could classify this occurrence as an extraordinary charge.
ii. Describe the placement and terminology used to present the extraordinary charge in the 2010 income statement.
b. Refer to the fourteen cost items identified by the corporate accounting staff of Goods Company.
i. Identify the cost items by number that should be included in the extraordinary charge for 2010.
ii. For any item that is not included in the extraordinary charge, explain why it would not be included in the extraordinary charge.