Clark Security Systems’ revenues for 2012 totaled $25.9 million. As with most companies, Clark is a defendant in lawsuits related to its products. Note 14 of the Clark Annual Report for 2012 reported the following:

14. Contingencies

The company is involved in various legal proceedings.... It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable.

Requirements

1. Suppose Clark’s lawyers believe that a significant legal judgment against the company is reasonably possible. How should Clark report this situation in its financial statements?

2. Suppose Clark’s lawyers believe it is probable that a $2.0 million judgment will be rendered against the company. Report this situation in Clark’s financial statements. Journalize any entry required by GAAP. Explanations are not required.