On January 17, 2011, an explosion occurred at a Sims Co. plant causing extensive property damage to area buildings.

Although no claims had yet been asserted against Sims by March 10, 2011, Sims’ management and counsel concluded that it is likely that claims will be asserted and that it is reasonably possible Sims will be responsible for damages. Sims’ management believed that $1,250,000 would be a reasonable estimate of its liability. Sims’

$5,000,000 comprehensive public liability policy has a

$250,000 deductible clause. In Sims’ December 31, 2010 financial statements, which were issued on March 25, 2011, how should this item be reported?

a. As an accrued liability of $250,000.

b. As a footnote disclosure indicating the possible loss of $250,000.

c. As a footnote disclosure indicating the possible loss of $1,250,000.

d. No footnote disclosure or accrual is necessary.