Aaron Robinson’s Architecture Ltd. (ARAL) is a private company that reports its financial results in accordance with ASPE. Unfortunately, a three-story apartment building that ARAL designed recently collapsed. The owners of the apartment complex are suing ARAL for $10,000,000 in damages. ARAL’s legal counsel estimates that the plaintiff has an 80% likelihood of success, and that if successful the litigants will be awarded $6,000,000 to $8,000,000, with all payouts in this range being equally likely. ARAL’s $5,000,000 errors and omissions liability insurance policy includes a $500,000 deductible clause.

Required:

For the situation described above, indicate the appropriate accounting treatment. If the circumstances require the recognition of a liability, record the journal entry.