(Accounting for medical malpractice claims)

Caire-Less Hospital carries no insurance for medical malpractice claims. Analysis of medical malpractice claims at year-end shows the following:

1. Claim A is for $\$ 500,000$. The hospital's attorneys are 90 percent confident that the hospital will win the claim if it goes to trial. The hospital will not settle the claim for any amount and is awaiting trial.

2. Claim B is for $\$ 400,000$. The hospital's attorneys are not confident of winning if the case goes to trial. They believe the claim can be settled out of court, within the range of $\$ 100,000$ to $\$ 200,000$.

3. The hospital also has 20 outstanding smaller claims. The average claim is for $\$ 10,000$. Past experience shows that the hospital loses 60 percent of the claims, and the average loss on them is 30 percent of the amount claimed.
4. Experience also shows that two small claims, relating to incidents occurring before year-end, are likely to be received during the following year.
Required: 1. Compute the amount, if any, that the hospital ought to establish as a liability on its balance sheet for malpractice claims. Discuss the content of any note disclosures that the hospital should make.
2. Describe the accounting principles leading to your conclusions.