Question $32(3$ points$)$

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In March $20$X$2,$ an explosion occurred at Lester Co$.\text{'}$s plant, causing damage to area properties. By May $20$X$2,$ 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 $31,20$X$1$ financial statements, for which the auditor's fieldwork was completed in April $20$X$2,$ how should this casualty be reported?

Question $32$ options:

As an accrued liability of $$400,000.$

As a note disclosing a possible liability of $$4,000,000.$

As a note disclosing a possible liability of $$400,000.$

No note disclosure of accrual is required for $20$X$1$ because the event occurred in $20$X$2.$