On January 17, 2011, an explosion occurred at an Orioles Fireworks plant causing extensive property damage to area buildings. Although no claims had yet been asserted against Orioles by March 10, 2011, Orioles' management and counsel concluded that it is reasonably possible Orioles will be responsible for damages and that $2,500,000 would be a reasonable estimate of its liability. Orioles' $10,000,000 comprehensive public liability policy has a $500,000 deductible clause. In Orioles' December 31, 2011, financial statements, which were issued on March 25, 2012, how should this item be reported?
A) As a footnote disclosure indicating the possible loss of $500,000
B) As an accrued liability of $500,000
C) As a footnote disclosure indicating the possible loss of $2,500,000
D) As an accrued liability of $2,500,000

Question

Quizplus · Accepted Answer

Since it is reasonably possible but not probable that Orioles will be responsible for damages, the potential loss should be disclosed in a footnote rather than accrued as a liability. The deductible amount of $500,000 is the potential loss Orioles might incur.

On January 17, 2011, an Explosion Occurred at an Orioles