In March 20X2, an explosion occurred at Lester Co.'s plant, causing damage to area
properties. By May 20X2, no claims had yet been asserted against Kirk. However,
Lester's management and legal counsel concluded that it was reasonably possible
that Lester would be held responsible for negligence, and that $4,000,000 would be
a reasonable estimate of the damages. Lester's $5,000,000 comprehensive public
liability policy contains a $400,000 deductible clause. In Lester's December 31, 20X1
financial statements, for which the auditor's fieldwork was completed in April 20X2.
how should this casualty be reported?
No note disclosure of accrual is required for 20X1 because the event occurred in
20X2.
As a note disclosing a possible liability of $400,000.
As a note disclosing a possible liability of $4,000,000.
As an accrued liability of $400,000.
