Product recall- Darjeeiling co. 2018 s/d

The moment of the announcement of the product recall creates an obligation to refund all sales so Dr Revenue/Cr Provision.for refunds
But associated with the liability is the return of faulty products. This would initially be recorded at the cost of the inventory:
Dr “Right to return asset”/Cr Cost of sales
The net effect of these two journals is to remove the profit on the sale of these products from SoPL.
I called it “right to return asset” to distinguish it from physical inventory.
As and when products are returned, the company will pay refunds:
Dr Provision for refunds/Cr Cash
(or issue credit notes: Dr Provision for refunds/Cr Receivables).

At the end of the reporting period, any faulty goods physically in inventory would be included in inventory (at lower of cost and NRV) and any remaining balance on the “right to return asset” would also be written down if less than cost.

If, overtime, customers do not return the product (say there is a period of years in which to return the product), any balance on the provision would be written back to revenue (and the asset to cost of sales) – thus reinstating the profit on these products.

Note that this is simplified for the case where product recall gives rise to a refund – if product recall was for a repair/upgrade, the original sale would not be reversed and it would be accounted for like a warranty provision.