On January $17,$ year $2,$ 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 $10,$

year $2,$ 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 $31,$ year $1$ nancial

statements, which were issued on March $25,$ year $2,$ how should this item be reported?

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

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

No footnote disclosure or accrual is necessary.

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