In March year 2, an explosion occurred at Nilo Co.'s plant, causing damage to area properties. By May year 2, no claims had yet been asserted against Nilo. However, Nilo's management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Nilo's $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo's December 31, year 2 financial statements, for which the auditor's fieldwork was completed in April year 3, how should this casualty be reported? As a footnote disclosing a possible liability of $300,000. As a footnote disclosing a possible liability of $3,000,000. No footnote disclosure or accrual is required for year 3 because the event occurred in year 2. As an accrued liability of $300,000.
In March year 2, an explosion occurred at Nilo Co.'s plant, causing damage to area properties. By May year 2, no claims had yet been asserted against Nilo. However, Nilo's management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Nilo's $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo's December 31, year 2 financial statements, for which the auditor's fieldwork was completed in April year 3, how should this casualty be reported? As a footnote disclosing a possible liability of $300,000. As a footnote disclosing a possible liability of $3,000,000. No footnote disclosure or accrual is required for year 3 because the event occurred in year 2. As an accrued liability of $300,000.
Chapter6: Deductions And Losses: In General
Section: Chapter Questions
Problem 1RP
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In March year 2, an explosion occurred at Nilo Co.'s plant, causing damage to area properties. By May year 2, no claims had yet been asserted against Nilo. However, Nilo's management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Nilo's $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo's December 31, year 2 financial statements, for which the auditor's fieldwork was completed in April year 3, how should this casualty be reported?
As a footnote disclosing a possible liability of $300,000.
As a footnote disclosing a possible liability of $3,000,000.
No footnote disclosure or accrual is required for year 3 because the event occurred in year 2.
As an accrued liability of $300,000.
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