In February 2017,an explosion occurred at a Dinkol Company plant,causing damage to area properties.By April 15,2017,no claims had yet been asserted against Dinkol.However,Dinkol's management and legal counsel have concluded that it is possible but not probable that Dinkol might be held responsible for negligence.Furthermore,they have determined that a reasonable estimate for damages might be as much as $4,000,000.Dinkol's comprehensive public liability policy contains a $400,000 deductible clause.For Dinkol's December 31,2016 financial statements,for which the auditor's fieldwork was completed in April 2015,how should this possible casualty loss be reported,if at all?
A)as an accrued liability of $400,000
B)as a note disclosing a contingent loss of $400,000
C)as a note disclosing a contingent loss of $4,000,000
D)No disclosure or accrual is required.

Question

Quizplus · Accepted Answer

As of December 31, 2016, no claims had yet been asserted against Dinkol and the possibility of liability is not probable, but rather only possible. Therefore, the loss should be disclosed as a contingent liability in a note to the financial statements, but it should not be accrued or reported on the balance sheet as a liability. The estimated amount of the loss, $4,000,000, should be disclosed in the note, but the deductible amount of $400,000 should also be disclosed as a reduction to the estimated loss. Hence, the best choice is option B.

In February 2017,an Explosion Occurred at a Dinkol Company Plant,causing