Problem: A fire occurred in March 2014 at Lincoln Lumber, Inc., causing damage to nearby properties. By May of 2014, no claims had yet been asserted against Lincoln. However, Lincoln's management and legal counsel concluded that it was reasonably possible that Lincoln would be held responsible for negligence, and that $1,000,000 would be a reasonable estimate of the damages. Lincoln's $10,000,000 comprehensive public liability policy contains a $500,000 deductible clause. In Lincoln's December 31, 2013 financial statements, for which the auditor's fieldwork was completed in April 2014, how should this casualty be reported?
1) As a note disclosing a possible liability of $500,000.
2) As a note disclosing a possible liability of $1,000,000.
3) As an accrued liability of $500,000.
4) Since the event occurred in 2014, no disclosure or accrual is required in the 2013 statements.