Problem 1: In March 2007, an explosion occurred at Howe Co.'s plant, causing damage to area properties. By May 2007, no claims had yet been asserted against Howe. However, Howe's management and legal counsel concluded that it was reasonably possible that Howe would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Howe's $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Howe's December 31, 2006 financial statements, for which the auditor's fieldwork was completed in April 2007, how should this casualty be reported?
Problem 2: Vertex Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Vertex lawyer states that it is probable that Vertex will lose the suit and be found liable for a judgment costing Vertex anywhere from $2,200,000 to $8,000,000. However, the lawyer states that the most probable cost is $5,600,000. As a result of the above facts, Vertex should accrue?