On January $17,20$X$1,$ 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 $10,20$X$1,$ Sims' management and counsel concluded that it is likely that claims will be asserted and that it is reasonably possible that Sims will be responsible for the damages. Sims' management believed that USD $1,250,000$ would be a reasonable estimate of its liability. Sims' USD $5,000,000$ comprehensive public liability policy has a USD $250,000$ deductible clause. The insurance company has confirmed that Sims would be eligible to get money from the insurance company if the residents made a claim. In Sims' December $31,20$X$0,$ financial statements, which were issued on March $25,20$X$1,$ how should this item be reported?

Answer

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

No footnote disclosure or accrual is necessary.

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

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